Smartphone industry at crossroads
Chips shortage, rising production costs slow industry growth
Published: Jun 02, 2021 07:18 PM
Customers visit a Huawei store in Fuzhou, East China's Fujian Province. Photo: cnsphoto

Customers visit a Huawei store in Fuzhou, East China's Fujian Province. Photo: cnsphoto

This is another bustling year for mobile phone companies in China that are beefing up efforts to snap up a larger market share during the "6-18" online shopping festival. 

Most of the phone vendors have offered generous discounts to attract customers in the country's second largest online shopping events. Apple has cut the price of its 128GB iPhone-12 by 1,400 yuan ($219.5) to a record low of 5,308 yuan. 

A new vice president of domestic phone brand OnePlus gave his first live streaming promotion during the shopping festival, while Chinese smartphone maker Realme rolled out subsidies of 700 million yuan in total to attract buyers. 

The discount, however,  in not an easy decision for mobile phone companies to make, as they are struggling to make a choice between boosting sales by dangling discounts and controlling costs amid rising price of materials. 

The phone vendors are all-in to boost sales and increase market share at a time when China's mobile phone consumption is showing signs of stagnation.  The vendors need to take extra care to watch their profit margins, otherwise their businesses are likely to end in red, as prices of semiconductor chips and other necessities are constantly growing up.  

Rising pressure to make a profit

"We are rolling out this year's 6-18 festival promotions amid rising pressure," Xu Qi, the vice president of Realme, said in an interview with the 21st Century Business Herald.

Xu is particularly concerned with the rising cost of materials. "The rise in mobile phone materials prices has brought many changes to the supply and demand chain of this industry. Frankly speaking, the cost of mobile phones has risen considerably, and it's  very likely mobile phone selling prices could increase in the second half of this year,"  he said.

There are multiple factors causing the price surge. In particular, the shortage of zinc has caused the price of chips and other raw materials to soar, which has in turn driven up the whole smartphone industry's manufacturing cost.

"Rising price is bad news for the smart phone industry, as it would suppress consumers' purchasing demands to some extent," Liang Zhenpeng, a veteran industry analyst, told the Global Times. 

On the other hand, the rising production cost means that mobile phone companies don't have much leeway in promotions or sales events, as they have to manage narrowing profit margins. 

Xu noted that although Realme has achieved sales growth in the first quarter of 2021, but compared with last year, the problem of chip supply crunch and rising cost of mobile phone parts would exert pressure for the industry. 

He predicted that the problem of chip shortage and rising material cost would extend through the whole of this year till the first half of next year, but he won't give a definite answer whether Realme would raise phone prices. 

Weakness in phone sales

While mobile phone vendors' move to launch promotions is restricted by cost concerns, they still have to do so at a time when mobile phone consumption is showing signs of weakness. In April, China's mobile phone shipment slumped by 34.1 percent on a yearly basis to reach 27 million sets, and only 32 new mobile phone models were launched during the month, down 37.3 percent. 

The decline has caused concern among Chinese industry experts, some of whom said that China's mobile phone sales might achieve zero or negative growth in the second half of this year. 

Liang said that the primary reason for the sales decline is because China's smart phone market is largely "saturated". Many consumers are satisfied with the speed of their 4G phones and do not have a hankering to update their phones to 5G ones. As a result, the speed of mobile phone updating has slowed down. 

He predicted that, if the mobile phones' prices keep on going up, it's possible that the country's smart phone sales might record  zero growth or even a negative growth in the second half of this year. 

Sun Yanbiao, president of the Mobile No.1 Research Institute, told the Global Times that the year-on-year sales decline in April was within expectation due to a high base at the same period last year when domestic smartphone sales saw a robust rebound following a difficult shipment period between January-March due to COVID-19 outbreaks.

"April is traditionally an off season for smartphone shipment after the Spring Festival holiday when Chinese consumers would like to change for a new device," said Sun, adding that current lack of innovative technologies of mobile phones could not stimulate consumption zeal.

Despite signs of weakness, experts are not pessimistic about the prospects of China's mobile phone industry, as they argued that both China and overseas markets will still shift to the 5G gear, slowly. 

"It's still too early to tell whether a turning point has emerged in the industry, because the shift from 4G to 5G will eventually prompt more people to update their phones in the long run, and the demands for smart phones will still be exuberant," Liang said. 

So far, although mobile phone companies are facing a dilemma in which they have to choose between increased sales and higher profit margin, many of them have already given their answer: that is, they still opt for greater sales, even though that means they will have to earn less.

Li Kaixin, vice president of OnePLus, recently told the media that the company has attached more importance to the "6-18" festival this year, because e-commerce is the "shortest way" for the company to reach mass consumers. 

Xu noted that Realme hoped to sell more than 1 million mobile phone sets during the "6-18" online shopping festival. 

Luffy Lin, chief analyst for Witdisplay, an electronics industry consulting platform, told the Global Times that with the current problems like rising costs, mobile phone companies should strive for high-end transformation via technological innovation. 

"I believe mobile phone companies will prefer to roll out more high-end phone models to cater to the mobile phone update trend," he said.