China has long been the world’s largest market for smartphones. But its sales hit a new low in Q1, despite the country reopening after the end of zero-Covid policies. The total market was down nearly 12%, as IDC data shows. And all the majors lost ground, with even Apple’s sales down 7%.
Global sales were also down 14%, at an annualised rate of 1.2bn, as the chart shows. As noted here in February, this followed a dire Q4 – when sales were down 19% versus Q4 2021.
Yet back in March, Strategy Analytics had confidently expected sales to increase:
“Considering the reopening of China, the slowing interest rate increase by the Fed, and the better-than-expected economy outlook in Europe”.
TODAY’S INFLATION IS BEING CAUSED BY THE WAR, NOT BY “EXCESS” CONSUMER DEMAND
Part of the problem is being caused by the war in Ukraine and the inflation generated by higher energy and food prices.
As discussed here since April last year, a key issue has been natural gas prices and availability.
“Essentially, the problem is a timebomb which is set to explode over the next few months unless governments work together to increase arable planting, establish emergency stocks, and subsidize fertilizer costs whilst gas prices remain at today’s record levels.”
Governments did do their best to replace Russian gas supplies and reduce prices. But for most of last year, around 70% of Europe’s ammonia production was either reduced or shutdown.
Nitrogen fertilizer supplies for the 2023 season were massively disrupted.
And even when fertilizer was available, the shortages meant it was often too expensive for farmers to use.
THE MIDDLE GROUND IS DISAPPEARING AS THE MARKET DIVIDES INTO WINNERS AND LOSERS
Clearly, smartphone sales are suffering as a result. But the scale of the downturn is clearly trying to tell us something rather important about the state of the global economy.
Apart from the impact of the war, the real issue is the lack of consumer demand. We are in a “Demand Recession” for the first time in history.
The reason is simple. Due to increasing life expectancy, and falling fertility rates:
- The Perennials 55+ generation are now the main source of population growth in all the major economies (except India), and globally
- They aren’t having children and already own most of what they need – and their spending declines by ~40% as they move into retirement
Smartphones are essentially a case study for this New Normal world. As the chart shows, the end of the BabyBoomer SuperCycle means that the middle market is now disappearing:
- Samsung dominated this middle ground, with a peak market share of 35% in Q3 2013
- But their share collapsed to just 21% in Q1 (and 20% in Q4), despite its folding phone model
- And they seem likely to see sales come under even more pressure
Apple, on the other hand, have begun to respond to this new dynamic:
- Until recently, they have aimed for Value Chain Domination and focused on the high-end of the market. Today, the iPhone 14 Pro Max costs $1599
- But today, they are increasingly starting to compete with low-cost Chinese producers like OPPO, Xiaomi and Vivo in the Cost Leadership segment
They have had a dual strategy. Their first move was to keep older models in the market at lower prices, rather than withdrawing them.
Early generation iPhone SEs are now available for <$200. And they still offer software upgrades for 2017 models.
More recently, they have made a second move into the used market, where iPhones dominate, as the Wall Street Journal reports:
“Worldwide, 283m used or refurbished smartphones were sold in 2022, estimates market research firm IDC, representing nearly one in five of all phones sold that year.”
In other words, cheap used phones priced at<$200 are now the only growth area in the smartphone market. Companies who just sell hardware are now set to be Losers as their profits tumble. And companies like Apple, with a strong brand and service offering, will be long-term Winners.