The smartphone upstarts

There's a host of smartphone makers across the globe eating away at Apple and Samsung's dominant positions in the market. Their combined effect could soon become an increasing drain on the profit margins of the high-end phones.

The Conversation

For most people, smartphones are synonymous with only a handful of companies. This is understandable given that the market leaders Samsung and Apple are responsible for 50 per cent of global smartphone sales. Apple’s role in particular as the initial innovator of the technology has been driven by its prominence in the US, until recently the world’s biggest market.

But outside of the US, Europe and Australia, the story is very different. In China, now the world’s largest smart phone market, as well as fast-growing markets of India and Brazil, a number of newcomer local brands represent a major challenge for both Apple and Samsung.

In 2012, China surpassed the US in terms of the number of smartphone users. Of the 800 million smartphones that will shipped in a year, around 27 per cent of them will be sold in China, compared to 18 per cent in the US. Of that market, Apple has a 5 per cent share.

Although Samsung is the most popular smartphone brand in China, the next two manufacturers are Lenovo and Yulong Coolpad, brands hardly known outside China. Yulong in particular has seen a spectacular rise in fortunes in China mainly due to a “carpet bombing” approach to developing phones that will appeal to all sectors of the market. In 2012, they released 48 different models of phone including a model in the US.

After Yulong comes more Chinese companies, ZTE, Huawei and another newcomer Xiaomi. Xiaomi was in the news recently after hiring Google’s Android executive Hugo Barra. Barra has been brought on specifically to make Xiaomi a global brand.

The rise of the Chinese brands within China is not surprising. Even though consumers may aspire to buying an iPhone, price is more of an issue, especially without the heavy phone subsidies available in the US. This is a problem for Apple who have made it very clear with the pricing of what was supposed to be the “cheaper” iPhone 5C, that they don’t intend to compete in any other price category than high end.

The situation is repeated in what could be the world’s second largest market, India. Local brand Micromax is second there to Samsung. Another local brand Karbonn, make a smartphone costing as little as $50.

Local brands have a number of advantages that companies like Apple and now Microsoft/Nokia will find hard to compete against. They have access to Google’s Android operating system which they can localise to suit their local networks, language and culture. They usually bring out new models of phones much faster than Apple’s, and it is likely that they can be supported better and cheaper locally. The key here is that there is nothing inherent in the technologies being implemented by Apple or Samsung that can’t be matched by other companies willing to accept lower margins to compete on cost. In fact some companies like Chinese manufacturer Oppo who is making phones with hardware innovations like a “swivelling” camera.

In some local markets like Brazil where there isn’t necessarily a local smartphone company, import taxes severely disadvantage already expensive phones from Apple. Samsung has got around this problem by manufacturing phones locally, something that Apple is also trying to do with their Taiwanese manufacturing partner Foxconn. It is not clear however whether the local manufacturing has actually started yet and it has already been beset with spiralling costs.

On a side-note and on a very much smaller scale, is another sector of the smartphone market which is emerging and that is the “boutique” local phone. An example of this is the Netherland’s Fairphone which has a limited production run of 50,000 phones and is designed on the principle of being “ethically” sound. Precious metals are sourced from suppliers where the money will not fund forces involved in armed conflict for example. It is interesting to note that Apple could have sold their entire planned production of 50,000 phones in 12 minutes at the rate the iPhone 5S and 5C sold over their first weekend.

It is unlikely that any of the local or boutique smartphone companies will usurp Apple and Samsung individually and certainly not on a global front. Their combined effect however will be an increasing drain on the profit margins of the high-end phones. Samsung in particular spends a spectacular amount of money on marketing and cost cutting to maintain its dominance in markets like China and India. For Apple, their main challenge will be to convince the market that they can grow their smartphone share despite a seemingly impossible task of taking on the locals in their own back yards. So far, this is a task that only Samsung seems to be winning.

David Glance does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations. This article was originally published at The Conversation. Read the original article.