As most of the biggest names in the mobile industry gathered last February in Barcelona for a massive trade show, a company called Gionee had one of the biggest smartphone launch events that you probably never heard about.
As hundreds of journalists and observers packed into a small stage area, William Lu, president of the China-based company, took the stage wearing a blue sports coat and green shirt. He came not only to announce the debut of the Gionee S8, the company’s new flagship phone costing $475, but also to reveal a whole new branding of the company built around the slogan “Make Smiles.”
“People want to establish a relationship and have emotions,” he said, after tipping his hat to Apple’s design magic. “We believe in the power of smiles. From smartphone to ‘smilephone.’ We will devote ourselves to making smiles, starting from today.”
Most people reading this will likely never buy a phone from Gionee, which primarily sells into China and India. But Gionee represents the future of the smartphone market. Or at least a slice of it.
That’s because Gionee is one of dozens and dozens of smartphone makers that are generally lumped into a category that market research refer to as “others.” And while individually no member of this group poses a direct threat to leaders like Apple and Samsung, collectively they are the fastest growing segment of the smartphone market.
The rise of regional players around the globe is driven by the economics of manufacturing Android-based smartphones and the changing demographics of buyers. Fierce competition among contract manufacturers in China has driven down costs of building a 4G handset to as low as $50, creating a model that has induced a wave of feature-phone consumer holdouts to buy their first smartphone.
Patrick Moorhead, principal analyst at Moor Insights & Strategy, said the smartphone market has not been completely commoditized — yet. But the dynamics are shifting rapidly, putting growing pressure on Apple and Samsung to evolve their business models, to make clear they offer something worth the premium prices they charge or face further declines in sales.
“The smartphone ecosystem needs to watch out,” Moorhead said. “If new and relevant usage models aren’t improved and created, hardware will become commoditized.”
In its closely watched smartphone tracker, market research firm IDC reported that in 2012, Samsung had 30.3 percent of the market, followed by Apple with 18.7 percent. (The rest of the top 5: Huawei, LG, Lenovo.) The “other” category represented 40.1 percent.
By 2015, Samsung’s market share had tumbled to 22.7 percent, while Apple’s had slipped to 16.2 percent. (The rest of the top 5: Huawei, Lenovo, Xiaomi.) “Other” had climbed to 43.6 percent.
In gaining market share, these “others” are compounding the problem for market leaders by exerting tremendous pricing pressure:
For consumers, and for people worried about how to get the next billion consumers online, these falling prices are good news that opens doors. But for high-end brand name companies worried about profits and growth, they represent a growing vulnerability.
And according to IDC, the forecast is for those prices to continue to tumble in the coming years.
“The average selling price (ASP) for smartphones will … decline at a rate of 4.6 percent each year before reaching $236.38 in 2019,” wrote Anthony Scarsella, research manager for IDC’s Mobile Phones team, in a report. “A continued emphasis on low-priced smartphones heading into emerging markets will drive the average selling price of smartphones down each year.”
Strolling around the trade show floor at the massive Mobile World Congress, one can stumble across a seemingly infinite number of brands touting smartphones in booths large and small. I encountered them the first time I went to MWC in 2015, and again at the most recent show.
Given that Apple and Samsung tend to dominate the popular conversation about smartphones, I was puzzled to see so many companies that thought they saw enough daylight to somehow make a business out of selling smartphones.
Now, it’s worth noting that “others” technically includes plenty of names many consumers would recognize: LG, Microsoft, Acer, HTC, and Sony, to name just a few. Many of these companies had dreams of being top-tier brands only to find themselves grudgingly stuck at the B-level. But below them is a larger thicket of companies that are thriving with very different models.
There was Lexibook of France, touting smartphones for kids; MaxCom, the Polish feature company that moved up to smartphones; New Jersey’s Posh Mobile, which offers “elegance for all”; France’s ZOPO Mobile; Hisense, a state-owned Chinese enterprise; Micromax, which was once riding the wave of India’s growth, but now has stumbled a bit; and Nomu, the Chinese company that offers water-resistant phones, among other things.
Gionee represents one segment of the “others” brethren. Founded in 2002, the company has moved from feature phones to smartphones in recent years, a transition that inspired the decision to reboot its branding this year. As it has evolved, the company is pushing into the area of premium phones.
In an email interview, Gionee’s Lu said he considers the company’s main competitors to be Samsung and Huawei. Gionee sells into 50 countries, but its top three are China, India, and Nigeria. The company has been investing heavily in R&D and design, and its marketing highlights the quality of its phones cameras and unique features.
— Gionee (@Gioneeglobal) March 30, 2016
Gionee has also been investing in building a massive campus over the past decade at a cost of $155 million that includes its own manufacturing capabilities. The Gionee Industrial Park will be 330,000 square meters and will be able to produce 80 million phones per year when it’s completely finished. About half of Gionee’s 40,000 global employees work at the facility, according to the company.
— Gionee (@Gioneeglobal) January 11, 2016
Gionee’s strategic objective, according to its website: “Become the internationalized supplier of mobile communication equipment and mobile information service and one of the globally influential brands.”
“We target all user groups, especially those in a premium business class and middle class with a strong sense of fashion, who would like to connect the world emotionally and in style,” Lu wrote.
In contrast to Gionee’s premium ambitions is France’s Archos. The Paris-based electronics company, founded in 1989, more than a decade ago moved into areas like MP3 players, and later Android-based tablets. For the most part, their gadgets were aimed at budget-conscience consumers and sold not at electronics stores, but at retail outlets like supermarkets.
Three years ago, Archos saw the smartphone market heading its direction and decided to jump in for the first time, according to Benedicte Ernoult, the company’s marketing director. Their research showed that 86 percent of people in France wouldn’t pay more than $275 for a smartphone. And with component and contract manufacturing costs falling, they decided there was an opportunity.
“The cost has continued to decrease a lot,” she said. “When we launched our first phone, it was €199 ($227) for a 3G model. Now for €99 ($113) you get a 5-inch HD screen, 4G, and a nice camera. It’s a smartphone for everyone.”
Archos has no ambition to compete head-on with Apple or Samsung. Instead, Ernoult places the company in a category she calls “Regional Heroes.” That is, companies that just sell into a few countries.
Ernoult says Archos has a couple of key advantages. Some companies, like LG for instance, might spend years burnishing new phone designs in hopes of playing in the same league as Apple and Samsung and grabbing more premium customers. But Archos, with a focus on price and value, updates its phones every six months as components costs fall and contract manufacturers offer new features.
For now, Archos is doing well in France and western Europe, and is hoping to expand to other European countries over time. The company posted revenues of $180 million in 2015, up 20 percent over the previous year. It is now the seventh largest seller of smartphones in Europe, and has projected revenues of $228 million for 2016, according to Archos’ annual report.
“I think the big winner is the end user,” Ernoult said. “At €99, you have a much better phone than you used to have one or two years ago. And as soon as the LCD price decreases, we can have it on the market four months later. For Sony and LG, it takes more time to integrate the latest technology.
“We can be very fast and focused and deliver the right products at the right price.”
Tucked into different corners of the MWC trade show floors are another critical piece of this trend: An army of Chinese contract manufacturers.
Sure, you’ve heard of Foxconn. But at MWC, there were many more unknown names, mostly based in Shenzhen, China, like FortuneShip, Reeko, and Lephone. At its bright yellow both, Lephone was touting the fact that it had a “shocking price” for a 4G phone: $50. Though no doubt it’s nowhere near as sleek as the Samsung Galaxy S7 that was unveiled in Barcelona this year, its components and basic look are all pretty solid (5.5 inch HD screen, 8 megapixel camera, fingerprint ID).
These companies make these phones and let just about anyone else buy them and slap their names on them: carriers, the “regional heroes,” and other assorted brands.
Last year Pepsi made waves when it announced it was teaming with Shenzhen-based Scooby Communication Equipment, a contract manufacturer, to build a Pepsi-branded smartphone called the P1. The company launched a crowdfunding campaign on Chinese website JD Finance to jumpstart the project, but fell well short of its goal and never built them.
Still, Pepsi’s move raised some eyebrows. Really, a Pepsi smartphone? But in a world where Pepsi hands out all kinds of schwag like bluetooth speakers — well, a $50 Pepsi smartphone to hand out at parties and as a branding vehicle in China… why not?
This probably won’t be the last such stunt, because the fight for customers between these contract manufacturers has become brutal. China is facing waves of bankruptcies. That means even more price cuts to win clients and a search for new business models.
Johannes Huang, who works as a consultant and advisor to both brands and contract manufacturers in Shenzhen, says the competition is intensifying.
“It’s a highly competitive market for manufacturers in China, and many went bankrupt last year,” he said. “So they have to increase the quality to attract clients but they can’t raise prices because it’s too saturated.”
One strategy that has emerged is preloading applications. To keep prices of the phones low, companies charge fees to makers of applications to be preinstalled on phones. For those app makers, the phone is basically a customer acquisition strategy in a world where getting found in the Apple App Store or Google Play becomes tougher and tougher, he said.
“Manufacturers are not making money from the hardware but they now they have users,” Huang said. “Which means that mobile devices become a very important channel to access content and users for applications and games.”
Apple vs Samsung vs The World
For now, the two undisputed leaders of smartphones remain the same: Apple and Samsung. But both have lately begun adapting their approaches in subtle and not-so-subtle ways.
As the Wall Street Journal recently reported, Samsung has begun slashing prices on some models of its Galaxy phones in an attempt to stanch the decline in its market share in countries like China and India. And it’s been adding features into lower-end phones to make them more enticing, and buffing the design.
Of course, as the story notes, cutting prices to gain market share hurts profits. The challenge facing Samsung, then, is finding a way to grow in the low-end market while expanding the reach of its premium phones. And over time, getting those first-time buyers to move up the smartphone chain to pricier gadgets.
Apple, by contrast, has not taken to slashing prices. And it did not, as widely expected a couple of years ago, release a “low-cost” phone, instead launching the short-lived iPhone 5c with a plastic covering.
But in March, the company announced the iPhone SE, an update of the two-year-old iPhone 5s. With a 4-inch screen, it’s smaller the iPhone 6. More importantly, its starting price, at $399, is well below the iPhone 6s, which starts at $649.
The new iPhone SE comes during a fiscal year ending in September that many analysts are predicting will be the first year-over-year decline in sales since the launch of the first iPhone a decade ago. Indeed, in its most recent smartphone report, Kantor Worldwide said Apple’s market share in China’s largest cities dropped from 25.4 percent in the first three months of 2015 to 22.2 percent during the start of 2016.
“Android showed solid growth in urban China during the three months ending February 2016, due to strong sales during the period around Chinese New Year (February 8). This is always a busy promotional season, and Android brands were able to take advantage,” said Lauren Guenveur, mobile analyst for Kantar Worldpanel ComTech, in the report. “Up-and-coming local brands Meizu and Oppo both showed strong year-on-year growth, each capturing about 6 percent of smartphone sales.”
That’s two more “others” for Apple and Samsung to watch.
Still, analyst Moorhead says the two leaders have plenty of advantages and a strong chance to remain on top. Apple, for instance, may not get the person buying their first smartphone — but their ecosystem of apps and hardware remains distinctive. And the iPhone SE may be just enough to catch that buyer of a $50 phone when they’re ready to get their second smartphone.
“Smartphone buyers have actually become more brand conscious over the last 5 years as consumers have used phones in more personal ways,” Moorhead said. “Apple and Samsung need to invest in new premium experiences to show separation between premium and mid-tier. Both need to take advantage of this growing mid-tier of smartphones, and do it in a way that is unique and profitable across the entire line.”