Xi Guohua will not have to join any queues to get his iPhone. The China Mobile chairman was given one by Apple chief Tim Cook. Friday sees the launch of the iPhone on the Chinese network, with its mind-boggling 750m subscriber base. But the iPhone’s moment in the world’s biggest market comes just as the local competition is gearing up. If, as Apple’s (and Samsung’s) margins suggest, even high-end smartphones are becoming less profitable, what are the likes of Huawei, Lenovo and Xiaomi thinking?
Combined, China’s top 10 makers expect to shift more than 400m phones this year, a 50 per cent increase on 2013. About 440m smartphones will be sold in China in 2014, according to Credit Suisse – a 25 per cent jump. That includes Apple, Samsung and other top-tier makers, implying the home brands must also be aiming for other emerging markets, where sales are expected to rise a third, to 470m Chinese makers often have high-end ambitions, but their bread and butter is in the low- and mid-range phones that rule emerging markets.
Plentiful demand is one thing, making money is another. Apple and Samsung profit from using their scale and brands to cut costs and demand top dollar. Low-end phones cost far less to make. The cost of producing a so-so brand 4.7’’ screen phone could be as low as $94, Credit Suisse reckons, compared with $266 for Samsung’s Galaxy S4. But that cheap phone sells for $122, versus $554 for Samsung’s smash hit. That is a 10 times difference in gross profit. Sure, commoditisation will squeeze Samsung and Apple, but it will not entirely kill their pricing power. If consumers happily pay premiums for cigarettes and branded water, it is not hard to see value in a strong phone brand.