China Smartphone Market Shifts Towards Higher Price Point; Driven By Upgrading Users

Chinese market shipments slowed in Q3 2017 compared to a strong quarter last year, smartphone shipments1 in China were down 1% YoY but grew 3% sequentially during Q3 2017. Q3 2016 was marked by robust growth by a number of brands including OPPO and Vivo. This year shipment growth was strong in the second quarter, resulting in many brands ending Q2 2017 with high inventory levels and leading to softer shipments in the third quarter. However efforts to correct the excess inventory meant that sales to consumers were strong in Q3 2017, growing by almost 12% year/year.

These factors resulted in a close competitive dynamic between the top three brands. Compared to last year, where OPPO and Vivo were the fastest growing brands in China with volumes up 109% YoY and 78% YoY respectively, growth for these two brands has slowed down this quarter. Nonetheless, the two brands are still growing at a healthy rate and have closed on the previous quarter’s leader, Huawei. OPPO’s R11 was the bestselling model overall, which helped OPPO edge just ahead of Huawei during the quarter

Huawei’s growth for the quarter (+23% YoY) was stronger than its performance in the same quarter last year. This was possible thanks to a wider portfolio across a broad range of price bands, catering to different consumers. In spite of this, Huawei couldn’t keep up with OPPO and saw Vivo closing in as well, thanks to its X9 series.

Exhibit 1: China Smartphone Shipments & Market Share in Q3 2017

Source: Counterpoint Research Market Monitor Q3 2017

1.        Shipments refers to sales from the manufacturer to the first layer of the distribution channel. It is not the same as sales to the final consumer.

Xiaomi made a strong comeback, as its shipments grew 32% annually driven by strong demand for its Redmi 4X series at the low-end and Mi 6 at the high-end. Xiaomi’s strong recovery can be attributed to a streamlined supply chain and being more effective in securing key components. Additionally, Xiaomi has focused on expanding its offline distribution channel under the Mi Home brand, expanding its total addressable market.

While Xiaomi has made a strong comeback, it is still behind the market leaders. For Xiaomi, offline distribution is the key to reaching OPPO or Huawei’s scale, but most of Xiaomi’s sales are still skewed towards lower-end models. Xiaomi needs its premium flagship Mi Mix 2 to succeed like OPPO’s R11 and Vivo’s X series, to generate a halo effect and build brand equity.

While OPPO, Huawei, Vivo and Xiaomi have succeeded lately, all eyes are on Apple. Apple shipments grew by 17% YoY driven by an increased mix of its older generation iPhones and channel fill for the iPhone 8 series. However Apple exited the quarter with some iPhone 8 inventory due to softer than expected demand compared to the iPhone 7 series.

Apple’s  soft sales are expected to be temporary because some of the 100 million plus loyal iPhone users will upgrade to iPhone X and, if successful, it will help Apple to grow both volume and value as demand is likely to spread beyond normal cyclic quarters. Apple is still leading the premium segment (~$500 above) and strong performance from iPhone X will further consolidate Apple’s leadership in the segment.

Exhibit 2: Shipment Growth by Price Band


Counterpoint Shipment Growth by Price Band

Exhibit 3: Top OEMs  by Price Band

The Chinese smartphone market is now being driven by replacement users with the $300~$399 price segment being the fastest growing. This indicates that Chinese middle classes are spending more on affordable flagship offerings from major domestic players. Even in the premium segment, domestic players like Huawei are positioning their flagship models just below the premium offerings from Apple and Samsung. This strategy is designed to penetrate premium market while maximizing revenue and profit.