Smartphone market finally expected to grow again in 2020

After years of misery, decline and shrinking profits, IDC is estimating the smartphone market might actually grow in 2020 thanks to 5G.

The 4G era produced a boom in technology adoption few would have predicted, though the years which followed were slightly less profitable. Since 2017, worldwide shipments of smartphones have been in decline, though it does seem the 5G buzz is living up to its reputation in at least one area.

Shipments are forecast to decline slightly over the remainder of 2019, however IDC is estimating year-on-year growth of 1.6% in 2020.

“The anticipation of 5G, beginning with smartphones, has been building for quite some time but the challenges within the smartphone market over the past three years have magnified that anticipation,” said Ryan Reith of IDC.

“To be clear, we don’t think 5G will be the savior in smartphones, but we do see it as a critical evolution in mobile technology. We expect the 5G ramp on smartphones to be more subtle than what we saw with 4G, but that is primarily because we are in a much different market today.”

The growth numbers are not as revolutionary as a decade ago, but they are certainly more palatable than another year of contraction.

2019 is proving to be another tough year for the smartphone manufacturers, IDC expects a year-on-year decline of 2.2% for the 12 months, though there are some glimmers of hope. Not only are 4G networks scaling in some developing markets opening-up a new window of opportunity for 4G handset sales, but the up-coming 5G euphoria creates an entirely new refreshment cycle in the developed markets.

This is something smartphone manufacturers and telcos have been looking forward to for years.

In the developed markets, as soon as smartphone penetration exceeded 100% of a country’s population, there was always going to be a struggle. Incremental improvements in terms of storage capacity, camera performance or software features, carried momentum for a period, but the decline of smartphone shipments was perhaps largely down to a lack of innovation.

Consumers are being asked to pay more for new devices, but without the attraction of innovation it becomes difficult to tolerate these purchases every year. A new camera is fine, but if it is only marginally better than the one you already have, does that justify the expenditure? Clearly it doesn’t as 2019 becomes the third-year straight for shipment declines.

This is what 5G offers manufacturers and telcos; something genuinely different to talk to consumers about and rationalise the process of purchasing a new device. It does something previous generations of devices do not.

Of course, despite the coverage limitations of 5G networks, the advertising campaigns are already in full swing, but who will be the winners and losers?

Samsung was one of the first leading brands out of the gate, and alongside Xiaomi, it could benefit significantly from the woes of Huawei. 12 months ago, we were contemplating if Huawei could overhaul Samsung and take the global market share lead, though a lot has changed during that period.

Huawei looks in a very suspect position currently. Its supply chain currently looks in a precarious position, and while this will not threaten the existence of the brand, it might lead some to question the quality of the end-product. US suppliers can be replaced, but can Huawei seek alternatives which can fulfil the same order quantities reliably, and will the components perform as well as those offered by incumbent suppliers?

One of the most interesting developments here concerns Google, its mobile applications and its Android operating system. Last week, both Google and Huawei confirmed the new Mate 30 will be shipped without the Google applications. There might be a workaround, though should the trade conflict between China and the US continue, Huawei will be forced to use its own Harmony OS.

This presents problems on two fronts. Firstly, will Android fan boys trust the unknown of a new operating system. And secondly, how much reputational damage has been done to Chinese brands by the White House; will consumers trust a Chinese brand without the middle man of a US operating system?

These are the unknowns, but the early signs do not look promising for Huawei. Research from Canalys suggests Huawei smartphone shipments in Western Europe during the most recent quarter has declined by 16% after President Trump dragged the brand through the mud, though there is an upshot for both Xiaomi and Samsung, who increased shipments 48% and 20% respectively.

Another brand which might suffer at the beginning of the 5G era is Apple.

“A lack of 5G support in the new iPhone won’t surprise anyone, though it will still disappoint operators looking for 5G devices to help them drive traffic to new 5G networks,” said Peter Jarich, Head of GSMA Intelligence.

“At the same time, new features that are expected – improved camera functionality, improved processor, upgrade to Wi-Fi 6 – may all seem incremental rather than revolutionary, particularly if the product line and form factor line-ups remain relatively constant.”

Apple has a very loyal customer base, while the closed-ecosystem has forced loyalty upon others. However, Apple will be testing the limits of loyalty. 5G will be plastered on every wall, each advert and on the lips of every consumer before too long. Apple will have to be confident it can convince customers to delay the purchase of a 5G device until it is ready to launch its own, otherwise it could risk losing those customers to the Android ecosystem permanently.

Looking at the IDC forecasts, iPhone shipments are expected to decline 14.8% year-on-year, due to market maturity and a lack of 5G-compatible device. When the firm does deliver its 5G device in 2020, it will have to prove it is better than rivals to justify the delay in delivery, otherwise the precious brand could be damaged.

This is not new from Apple. This is a company which doesn’t necessarily want to be the first to market, but it does invest heavily to be the best. It will have to do the same once again.

What is also worth noting, is this is just the beginning of the 5G era. A swing back to growth in 2020 for year-on-year smartphone shipments is encouraging, however the momentum will have to be compounded and the only way to do this is through the development of an ecosystem, applications and broader usecases.

Right now, the telcos and the ecosystem are only really talking about one thing; speed. If you believe the hype, 5G is going to be between ten and a hundred times faster than 4G. This might sound good as an advertising tagline, but a continued focus on speeds will become tiresome. Consumers will realise the excess speed is redundant soon enough, and this is another path which takes the telcos towards commoditisation.

More interesting usecases for 5G will have to emerge, and some of them will be reliant on improvements realised for latency.

Gaming is one area which is becoming increasingly dominated by mobile, and the more comfortable people are using higher volumes of data on the move, the greater this dominance will become. Lower latency will certainly help the case here, as more real-time gaming experiences become palatable.

The connected car is another development where 5G and lower latency could add to the momentum. Right now, the usecases are simplistic, though incremental gains in the connectivity world are improving the prospects for entertainment providers and application developers in the car. And we haven’t even mentioned the dreaded ‘autonomous’ tag this time around.

Of course, when you are talking about an entirely new generation of connectivity, you have to talk about the unknown. Perhaps the most exciting applications are the ones we mere mortals will struggle to imagine today. Uber is a perfect example.

Uber seems like the simplest idea today, but no-one else thought of the idea until Travis Kalanick. This is an application which was only possible because of 4G and the mass adoption of mobile internet, which makes us wonder what is in the pipeline. There will be blue sky thinkers who have an idea, but it can’t be validated or tested until 5G is scaled. This is when 5G devices could genuinely accelerate.

Marginal growth is all well and good for the moment, though the ecosystem will drive the next generation of profits. Having a snazzy new phone is fine for the early adopters and tech enthusiasts, but when the normmies start seeing how much more can be done through a 5G device, interest will scale much faster.

This is an area which is of course very difficult to quantify; what is the awareness of 5G in the consumer segments, and how much do they actually care?

According to research from Ericsson, half of smartphone users in South Korea and Australia, as well as 40% in the US, claim they do not have fast enough mobile broadband connections. Those who live in the big cities around the world will also be familiar with the challenge of network congestion, offering another buy-in for 5G contracts. Respondents to the survey said they would be prepared to pay 20% more on average to realise the benefits of 5G. Those who are more familiar with the concept of 5G, said they would tolerate a 32% increase in prices.

Of course, these projections are largely meaningless unless there is proof of accuracy. That said, in South Korea SK Telecom is claiming to have secured 1 million 5G postpaid subscriptions in the first four months of network operations. This represents 3.5% of the total subscribers at the telco, demonstrating there is an appetite for the new generation of mobile connectivity.

There is clearly an appetite for 5G connectivity, and should the manufacturers be able to produce a product which is tolerable for the consumers, there could be profits sooner rather than later.

“Solid push of 5G smartphones by the mobile operators in China in 2020 will drive economies of scale for the phone makers, and we will see the prices of these devices globally slide down to much more acceptable levels from their current highs,” said VP of Forecasting at CCS Insight, Marina Koytcheva.

“5G will not drive everyone to the shops in a search for a new phone, but for a group of technology enthusiasts- early adopters of all things tech- the new generation of mobile technology will act as a catalyst for replacing their current smartphones.”

This is an awkward challenge which the manufacturers will face; pricing. Smartphones are eye-wateringly expensive nowadays, perhaps a contributor to the shipments decline, and 5G devices are likely to see another premium added onto the tag.

This will at least be the challenge in penetrating the smartphone market in the early days, though Koytcheva is a bit more confident than IDC. CCS Insight are suggesting shipments could increase by 3% year-on-year over the next twelve months. This number will account for 4G devices in increasingly digitised developing markets, though 5G will add impetus in the developed nations.

But the challenge still remains; if 5G smartphones are going to anywhere near replicate the success of 4G predecessors, economy of scale in manufacturing operations will have to be achieved.

We suspect, and many others do also, that 5G devices will not take the world by storm in the same way 4G devices did. The transition from 3G to 4G was much more dramatic in the consumer world than the current transition we are anticipating today. The long-tail of applications and network evolution might be greater, but the up-front glories will not necessarily be the same.

That said, even if it is marginal year-on-year growth for smartphone shipments, that is a lot better than a fourth consecutive year of contraction.

Is Xiaomi filling a Huawei-shaped hole in the smartphone market?

Huawei might be suffering in today’s political climate, but every action gets a positive and negative reaction and could Xiaomi be benefitting from its rival’s misery?

The Chinese challenger brand might have missed on market expectations for revenue, but it is not the worst set of financial results you have ever seen. Looking at the most simplistic measure of a company, it made more money than last year, brought in more profits and sold more products; not too bad.

“Thanks to the Xiaomi relentless efforts, we have managed to achieve solid growth in our businesses, posting a consensus-beating profit and becoming the youngest Fortune Global 500 company in 2019, despite global economic challenges,” said Xiaomi CEO Lei Jun.

“Our performance is testament to the success of our ‘Smartphone + AIoT’ dual-engine strategy and the Xiaomi business model. Looking ahead, we will continue to strengthen our R&D capabilities and investments so as to capture the great opportunities brought by 5G and AIoT markets and strive towards ongoing achievements for the company.”

Financial analysts will be pouring over the spreadsheets to understand why Xiaomi seemingly missed market expectations, but let’s not forget, the smartphone market is in a notable slump right now. Sales are slowing and the 5G euphoria is yet to hit home to compensate. No-one is immune from overarching global trends.

However, there is a glimmer of hope on the horizon for the majority of smartphone manufacturers; there are gains to be made from the Huawei misery.

According to the latest smartphone shipment numbers from Canalys, Huawei’s smartphone shipments in Europe have declined year-on-year by 16%, while Samsung and Xiaomi have grown their numbers by 20% and 48% respectively. Other factors will contribute to the increase, though there will be former-Huawei customers who are seeking alternatives brands at the end of their replacement cycle.

Huawei is in a bit of a sticky situation right now. Firstly, its credibility has been called into question, thanks to President Trump’s trade war, while its supply chain is suffering due to the tariffs from the aforementioned trade war. The supply of critical components is under threat, as are security updates from Google’s Android operating system. Both of these concerns will impact consumer buying decisions.

Looking at Huawei’s financial figures, the consumer business unit is still on the rise, revenues were up 23%, though when you take into consideration the analyst estimates, it would seem these gains are from the domestic market. If Xiaomi can avoid collateral damage, it could benefit from Huawei’s alleged downturn in the international markets.

This does seem to be the case. For the first half of 2019, Xiaomi’s revenues increased 20.2% year-on-year to roughly $13.55 billion. The international markets, an area of significant potential for Xiaomi, accounted for 42.1% of the total, compared to a 36.3% proportion in the same period of 2018.

The gains in Europe have been highlighted above, though the Indian market is looking like a very profitable one. IDC estimates suggest Xiaomi is still leading smartphone shipments in India and has done for the last eight consecutive quarters. Estimates from eMarketer state smartphone penetration will grow to 29% of the Indian population in 2019, year-on-year growth of 12.5%. There is still a massive amount of growth potential in this market which is undergoing its own digital revolution.

Another area which has been highlighted for gains by the Xiaomi management team is the increasing diversity of the product portfolio.

Aside from the Mi 9 series and Redmi Note 7 series, the team launched the new K20 flagship during the second quarter, with shipments exceeding one million in the first month. The CC Series has also seemingly gained traction with female audiences, while the Mi MIX 3 5G was one of the first 5G compatible devices to hit the market. Numerous telcos have partnered with Xiaomi for this device, suggested the team is taking the shotgun approach as opposed to signing exclusive partnerships.

What is clear, Xiaomi is a smartphone manufacturer which is heading in the right direction. However, the gains could be increased should the misery continue for Huawei.

Samsung and Xiaomi benefit from Huawei misery

US aggression towards Huawei seems to be paying-off as smartphone shipments in Europe swing away from the Chinese vendor, towards Samsung and Xiaomi.

Although Huawei is still a profitable and growing company, some might fear this growth is too concentrated on the Chinese market thanks to US attempts to damage credibility internationally. According to Canalys estimates, this could be the case, with European smartphone purchases shifting away from the previously surging Huawei brand and towards rivals Samsung and Xiaomi.

“For years, a focus on operating profit has stifled its product strategy,” said Analyst Ben Stanton. “But this year, the shackles are off, and winning back market share is its clear priority. But its success is not solely due to product strategy.

“Samsung has been quick to capitalize on Huawei’s US Entity List problems, working behind the scenes to position itself as a stable alternative in conversations with important retailers and operators.

“A lack of brand loyalty among users of low-end and mid-range Android smartphones, which has blighted Samsung for so long, has become the catalyst for its best performance in years. Europe keeps its reputation as one of the most brand-volatile smartphone markets in the world, rife with danger, but also opportunity.”

As you can see from the table below, the instability of the European market is living up to its reputation.

Brand Q2 2019 Shipments (millions) Q2 2019 market share Annual change
Samsung 18.3 40.6% +20%
Huawei 8.5 18.8% -16%
Apple 6.4 14.1% -17%
Xiaomi 4.3 9.6% +48%
HMD 1.2 2.7% -18%
Others 6.4 7.7% -17%
Total 45.1

Looking at the shift, there is clearly homage being paid to the troubles of the Chinese vendor.

Last month, Huawei unveiled its financial results for the first six months of 2019 with a 23% year-on-year increase. It did appear many of the gains, including in the fast-growing consumer business unit, were in its domestic Chinese market and this research from Canalys backs-up the assumption, at least for smartphones.

Perhaps this also demonstrates the smartphone has become merely a vessel for bigger and better things. With marginal differentiation between flagship devices nowadays, Huawei made gains with products which met consumer expectations but undercut rivals on price. This pricing strategy was paired with an aggressive above-the-line advertising campaign through football sponsorship and traditional advertising to build brand credibility.

However, the White House endorsed propaganda campaign seems to be hitting home. The only difference between now and 2018 is the dents to Huawei’s credibility. It appears European consumers are much more Android-loyal than they are to the smartphone brand.

The beneficiaries of this fall from favour has been Samsung and Xiaomi. Canalys claims three of the top five selling devices in the European market were Samsung, reasserting its dominance, though Xiaomi has continued its impressive rise through the ranks. This might be down to two reasons.

Firstly, Xiaomi’s reputation as a more price-aware brand is clearly catching-on. The Chinese challenger has been making promising gains in some of the developing markets, India is a prime example, though it has managed to position itself as a cheap but reliable alternative for cash-conscious consumers in the European market also. A 48% year-on-year gain is impressive in anyone’s eyes.

Secondly, telcos and distributors might be pushing Xiaomi and alternative Android devices more heavily through advertising campaigns. The more Android fanboys who are turned-off by Huawei, the more prominent Samsung becomes. The more prominent Samsung becomes, the greater its weight during negotiations with channel partners. A market dominant smartphone brand is not good for any of the telcos or the distributors.

The Apple decline is certainly an interesting one also. This is traditionally a quiet quarter for the iLeader, with flagship devices usually launched in September, though a 17% decline is a worrying sign for executives. With the fall in smartphone shipments significantly below the global total decline, either the iCultists are becoming much more price-sensitive, or they are being tempted by Android rivals. Neither is good news.

The global smartphone market is in decline currently, which is perhaps down to two factors more than anything else. Firstly, the current 5G hype might have consumers delaying the purchase of a new device, and secondly, the high-prices of largely uninspiring smartphones might be encouraging longer replacement cycles.

There will of course be numerous other factors to consider, but one thing is clear, some brands are negotiating the baron times much more successfully than others.

China plummeting and India soaring but Apple just can’t get a break

IDC had a stab at smartphone shipments in two of the worlds most lucrative markets, and it does not make pleasant reading for Apple.

As the Apple management team has now decided against dishing out the specifics on iPhone shipments in the quarterly statements, analysts are the closest we’re going to get for sales figures. Here, IDC is suggesting a sluggish market overall in China, with iPhone sales dropping considerably, while the Indian market is booming, but Apple can’t claim a slice of the action.

Starting with the Indian market, IDC estimates 142.3 million units were shipped across 2018, demonstrating a 14.5% year-on-year increase, though the final quarter saw a 15.1% sequential decline. This might not look as bad as it originally sounds however, as Q4 actually increased year-on-year 19.5%, suggesting the third quarter was just exceptionally positive.

“Amongst the big highlights of 2018 were the online-focused brands that drove the share of the online channel to an all-time high of 38.4% in 2018 and a whopping 42.2% in 2018Q4,” said Upasana Joshi of IDC. “This was primarily driven by several rounds of discounts by e-tailers driving affordability through various financing options, cashback offers and buyback schemes.”

The Jio effect is clearly sustainable across the country as Indian consumers appetite for the digital economy continues to grow. With the disruptive telco promising further expansion, greater digital inclusivity and additional services over the coming months, more consumers might be encouraged to upgrade to more premium devices. As Joshi notes, the premium end of the market was the fastest growing price segment, demonstrating 43.9% year-on-year growth.

What will be worrying for the iLeader is the inability to get a foothold in the market and capture the attention of Indian consumers. India is traditionally a market driven by low-end devices, however the encouraging growth of handsets priced north of $500 should offer some traction for Apple.

Xiaomi led the market, having recently overtaken Samsung, with 28.9% of total shipments, a healthy 58.6% increase from 2017. Samsung collected 24.7% of Indian devices sales, while Vivo had 10%, Oppo 7.2% and Transsion with 4.5% completes the top five vendors. The remaining 27% of shipments were shared through multiple vendors, Apple included, though the bundled peloton chasing the leading five saw total sales drop by 10.7% year-on-year.

With sales across the world seemingly declining for Apple, the booming Indian market is one it can ill-afford to miss out on. Last year, it announced it was moving manufacturing into the country, with partner Foxconn aiming to be up and running in early 2019, while there are also plans to expand the retail footprint. The team reportedly plan to open three massive stores in both Delhi and Mumbai, owing to the success of retail operations elsewhere around the world.

While India might be a headache due to the iLife indifference of the locals, China is turning into a full-blow migraine for completely separate reasons.

IDC estimate Apple’s smartphone shipments have declined by 19.9% in China, while the home favourite Huawei saw its own shipments grow by 23%. Apple’s loss is Huawei’s gain, though it does appear the iChief is losing its prestige badge in the market.

These figures are of course estimates, as Apple has decided against telling anyone about specific shipment numbers, though the revenues over the last quarter give a decent idea. During the last quarterly results, revenues for the Greater China region declined by roughly 26% from $17.9 billion to $13.1 billion. In years gone, Apple used to be able to simply release a new colour variant of flagships and China consumers would be queuing out the door, but the bonanza is over for the moment.

The big question is why? Of course, there will be a preference from some for local brands, and there will of course be the cash-conscious. But ultimately you have to wonder whether Apple is living up to the brand promise which it spend so many years cultivating; where is the innovation?

Over the last decade, Apple has crafted a brand which is built on the principles of innovation and technological supremacy. Steve Jobs was the figurehead of this image, and many Apple enthusiasts were prepared to pay the premium on devices because of this identity. However, in recent years, Apple has done little to differentiate its devices and justify the pricing premium which is placed on products. Of course, this is not just Apple, innovation has stuttered across the segment, but gone is the assumption Apple immune to market trends.

With revenues declining across the international markets, and Apple set to sit out the initial 5G devices euphoria over the next couple of months, 2019 is starting to look like a very uncomfortable year for Apple.

Xiaomi taking big steps on the global stage

After taking the lead in the Indian market, Xiaomi has continued the solid progress by snapping up second spot Indonesia, another one of the world’s most lucrative markets.

According to estimates from Counterpoint Research, Xiaomi has collected second place in the market share rankings for second quarter shipments (22%), only trailing behind worldwide leader Samsung (25%). Indonesian smartphone shipments grew 25% annually and 5% sequentially during Q2 2018, partly due to seasonal demands, but also down to the consumer becoming more entwined within the digital economy.

“The overall tech ecosystem in Indonesia is more robust as compared to a year ago,” said Tarun Pathak of Counterpoint Research. “With smartphone users all set to cross the 100 million mark this year, it presents an opportunity for the players in the mobile ecosystem to tap the growing demand of digital consumption. Users have now started migrating from entry level smartphones to mid-tier smartphones which has increased the replacement rate over the past few quarters.”

Xiaomi might have had a bit of a wobble during the end of 2016 and the beginning of 2017, but that looks to be nothing but a distant footnote now. Aside from leading the Indian market for the last two quarters for shipments market share, progress in the Indonesian market provides an excellent foothold in a digital economy which will only go upwards. While other brands are scrapping to capture the minimal profits in the developed markets, the Xiaomi strategy seems to be focus on the areas where smartphone penetration is low. The massive profits might be years down the line, but patient brand-building is a proven strategy.

Offering users entry-level smartphones begins the relationship, and with a broad portfolio of mid-range devices, Xiaomi can take users on a journey to the much hyped digital society. With smartphone penetration increasing, data tariffs becoming cheaper and digital services becoming more prevalent, it won’t be too long before lives are dominated by the small screen. Creating the relationship with the consumer now will serve Xiaomi very well in the long-run.

The success of Xiaomi has been partly put down to the success of the Redmi series through both offline and online channels, allowing it to lead the sub-$150 device segment. This segment still accounts for more than 50% of the overall market, while the $100-$150 sub-segment was the fastest growing price band across the quarter. The price is starting to creep up, which will start to make Indonesia attractive to other brands who operate at the premium end.

Looking at the premium end of the market, Apple currently has less than 1% of the market, though owing to a globally renowned brand increasing this share once the consumer is ready to spend bigger won’t be much of a challenge; there don’t seem to be many markets Apple can’t dominate. Xiaomi is attempting to create a position for itself at the top-end of the scale with the launch of Poco, but it will have considerable work to do to make sure it can compete with the likes of Apple and Samsung at the branding game.

Building the foundations in the developing markets before scaling the customer up through the low- and into the mid-end device portfolio is a sensible way to do business. Xiaomi is making powerful steps on the global stage through gradual relationship building.