Thought of the Day, 05/08/15: smartphowned
Smartphone leaders Apple and Samsung are being disrupted by Chinese manufacturers.They are being disrupted in terms of pricing. Xiaomi sells phones next to cost, and plans to make money off selling other associated products and services marketed through engagement with its phone, it's "ecosystem".
They are being disrupted in terms of target market. Xiaomi concentrates on users in emerging markets, where populations are high and wages are low, where incumbent emphasis on margins makes it a challenge to go after users where affordability is an issue.
They are being disrupted in terms of distribution model. Xiaomi and Huawei are online-only, so don't have to bother with the logistics of getting it to physical stores.
Apple and Samsung are publicly listed companies. Publicly listed companies are incentivised to emphasise their earnings, as this is a marketing signal to would be investors, as well as to keep their more fickle shareholders happy. Privately held Xiaomi and Huawei are incentivised to de-emphasise their earnings, as they do not have to subscribe to such short-termism, and an emphasis on reporting higher earnings means a bigger slice for the taxman.
Another key difference is that Xiaomi and Huawei are also Chinese - and this comes with it the disadvantage of volatility and policy uncertainty, but the advantage of higher valuations, (especially compared to Korea), and state support when it comes to funding from large, state-owned banks.
Apple has its own ecosystem, continues to be the aspirational brand, and so sort of sidesteps the emerging market user issue as he makes more money and looks for an upgrade, and in addition to online, Apple stores are a plus in maintaining the primacy of their brand anyway, so it does seem that the level of disruption the Chinese players bring to it is limited.
Samsung has had a much harder time, and this is illustrated by the decimation of its market share in China, losing 50% in a year.
But any careful analysis of Samsung will show that it is repositioning, and that most of the money it will make, as measured by operating margin, will come from its semiconductors (of which Apple is its biggest customer), and not its smartphone division. Instead of competing with Apple in a race, it's going to become more of a co-pilot.
Life is going to be difficult for all other manufacturers.
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