Industryweek 11740 Cheap Phone

The Chinese Are Coming, to Sell You a Cheap Smartphone: Industry Voices

Aug. 22, 2016
Chinese smartphone makers eye lucrative U.S. market.

In the next five years, a majority of U.S. consumers will have bought a Chinese-brand smartphone. Such a prospect may raise the hackles of purported American patriots and presidential candidates, but it's reality.

Outside of Apple and Samsung, Chinese brands rule the global smartphone market. LG gets a hand in from time to time, Blackberry isn't dead yet, and Nokia keeps bouncing from one identity crisis to another -- but the trend is irreversible.

Yet ask any consumer in the U.S. to name a smartphone that isn't Apple, or at the very least one that isn't Apple or Korean. There's only one way for Chinese brands to go from here. That's why their pending dominance is a fact, not just speculation or fear mongering.

Just as television makers Zenith, Motorola and RCA were eventually replaced by Japanese names like Sony, Sharp and Panasonic, so too will Chinese brands overtake the U.S. market.

The latest entrant looks set to be Xiaomi. The richly valued upstart appears ready to dip its toes in one of the world's most important electronics markets. While China is larger by volume, the U.S. is lucrative because average device prices are much higher.

In an interview with Bloomberg Television on Friday, Xiaomi's vice president and international front man Hugo Barra said a U.S. move is inevitable:

"We will lead with social media, with the channels that allow us to get in touch with the young generation that are enthusiastic about new technology. We are definitely going there."

Xiaomi's entry into the U.S. has been in doubt on concern that the Chinese company, which has been widely criticized as a wholesale copycat of Apple and others, would immediately face intellectual property lawsuits.

However, Xiaomi's purchase this summer of around 1,500 patents from Microsoft seems to have quelled those worries and given the Beijing startup the courage to move directly onto Apple's home turf.

The Chinese company won't be short of compatriots. ZTE, the world's number six smartphone brand, is fourth in the U.S., while TCL-Alcatel holds fifth spot. And then there's Huawei, now the world's number three, which will start selling its latest device under the Honor brand later this week. With solid technology, financial muscle and global aspirations, expect to see more of Huawei in the U.S. in years to come.

What's significant about a Xiaomi move is that along with the brand, the company is likely to bring the same business model that emaciated profits in the Chinese smartphone market: namely, direct online sales, social media-focused marketing and razor-thin margins.

That model has proven so compelling that Lenovo (which now owns Motorola's smartphone business) and Huawei have both incorporated it into their own strategies, while Oppo and Vivo are key beneficiaries. With ever fewer differences between Android models, this price fight portends declining share for Apple and Samsung.

Samsung and Apple combined U.S. market share is 59%.

This means that Chinese expansion will result in the U.S. starting to look a lot like every other market in the world. Whereas Apple and Samsung hold a combined 59% of the U.S. market, according to Counterpoint Research, they have just a 33% share worldwide. Global slots three through seven are all Chinese.

So while the nostalgic may decry the rise of China, they still need to face the fact that the U.S. smartphone industry has passed its zenith.

By Tim Culpan. This column does not necessarily reflect the opinion of Bloomberg LP or Penton/IndustryWeek and their owners.

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