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AH Primetime: Why Samsung’s Decline in China Is a Big Deal

May 4, 2015 - Written By Lucius Bossio

The days in which Samsung reigned supreme over the Chinese smartphone market are becoming a distant memory as the Korean chaebol continues to struggle to regain their position atop all manufacturers in terms of market share. The worst isn’t over yet. It seems Samsung has yet to hit the bottom of a precipitous free-fall that was initiated when China’s own Xiaomi dethroned them in the second quarter of 2014. Since losing their top spot Samsung has slipped to a lowly fourth place in less than a year. According to Strategy Analytics, a market research firm based in the US, Xiaomi has maintained their top position in the market and are now followed by Apple, then Huawei, and Samsung.

In the first quarter of 2015 Xiaomi shipped 14 million devices and netted 12.8% of the market, which is down from the 15.7% it captured in the final quarter of 2014. Although Xiaomi maintained its top position their decline in market share signifies a downward shift from the upward momentum they have enjoyed since they took the top spot in 2014. Samsung’s share is down from 12.1% to 10%, which isn’t a huge drop but it was enough to move them from being nearly tied with second place Apple to fourth place below Huawei, who is now in third with 10.2% market share. Where Samsung and Xiaomi have lost Apple has gained; they moved from a distant second to being nearly tied with Xiaomi at 12.3%. This was also reflected in Apple’s Q2 2015 earnings report (Apple’s fiscal year is off by a quarter, their Q2 is the rest of the world’s Q1), which indicated their revenue in China grew to $16.82 billion compared to $9.29 billion in Q2 2014.

Despite Samsung’s decline in China they managed to ship more smartphones in Q1 2015 than any other manufacturer and solidified themselves as the clear leader in terms of global market share, thus it appears Samsung does not need to dominate the Chinese market in order to be wildly successful. However, Samsung’s failure to stop bleeding market share in China is particularly worrisome. Just as Chinese manufacturers, such as Huawei, Xiaomi, ZTE, and Oppo, are eyeing up the juicy American market, firms that have established their success via strong sales in North America are vying for a spot in the pockets of Chinese consumers; for very good reason.

Apple’s revenues from China are growing faster than any other region in the world and are nearing the revenue they generate from the Americas. Last year LG pulled all of its low-end models out of China and began releasing midrange to high-end handsets, such as the G Pro 2 and G3, in order to revive profits. In February Motorola began selling the Moto X, Moto X Pro, Moto G and other models in China; following the announcement of Motorola’s reentry into the Chinese market Rick Osterloh, the president and chief operating officer of Motorola, stated “You can’t be a global smartphone player if you are not big in China.” HTC has also gotten in on the action with the recent announcement of the China-exclusive One M9+, which is a beefier version of the One M9 flagship with better specs and more features.

You may be wondering to yourself: “why all the fuss about China?” The answer is simple. Whether or not manufacturers can establish a strong presence in China will determine how successful they are relative to their competitors over the next four years (at least). According to Pew Research Center approximately 64% of Americans, about 204 million people, own a smartphone as of April 2015; whereas eMarketer estimates 519.7 million Chinese own a smartphone, or approximately 38% of the population. The US market is relatively saturated with respect to smartphone penetration, whereas China is not, thus the market has much more room for growth. Not only is the market less mature, it also represents a much larger proportion of the global population. If 64% of Chinese consumers owned a smartphone the market would be 868 million strong, which dwarfs the paltry 204 million offered to manufacturers by the US. In fact, eMarketer predicts China will have 704.1 million smartphone users by 2018; over the next four years the potential for growth in China is tremendous.

China is also undergoing an economic shift that could drastically improve the profitability of manufacturers who have a strong presence in the country. The Chinese smartphone market has traditionally been dominated by low-end devices or relatively low-cost flagships. This paradigm is about to change. The Economist has cited multiple analysts who expect China to finally overrun the US and become the largest economy in the world by the end of 2015. A potentially more significant milestone is China’s transition from an investment driven to consumption driven economy. Until very recently China’s investment in production outpaced domestic consumption; however, in January 2015 China’s National Bureau of Statistics revealed that consumption had contributed 51.2% to gross domestic product growth in 2014.

For many years Chinese households have lavished in double-digit percentage rises in income and consumers are generally optimistic about their employment and income prospects. Therefore, consumption is expected to grow 7% to 8% over the next few years, which should have a significant impact on retail sales, which grew 11.9% in 2014. As consumers become more willing to spend manufacturers will be able to sell more devices in the ludicrously profitable flagship range ($600-$900) rather than the low-end to affordable flagship range ($200-$450). Between China’s exponential growth in smartphone users and the potential to capitalize on consumers’ willingness to spend it is quite obvious why establishing dominance in China is of the utmost importance to device manufacturers.

At this point in time Apple and homegrown Xiaomi and Huawei are in the best position to cash in on the lucrative Chinese market. There is still hope for Samsung, they are not so far behind that a comeback is unthinkable, especially when we consider the latest numbers do not account for sales of the critically acclaimed Galaxy S6. It will certainly be interesting to see how the release of the Galaxy S6 impacts Samsung’s presence in China; initial sales figures do look very promising. Who knows, if Samsung continues to release devices that are generally lauded by the tech community they might be able to recapture the hearts and, most importantly, wallets of Chinese consumers by next year.