There are now 1.25 billion mobile phone users in China, with mobile phone penetration exceeding 90%. The Chinese mobile phone market is far from mature, however, with revenues and shipments growing by 53% and 64% respectively in the first quarter of this year.
Overview of the market situation
By the end of this year, China is expected to overtake the USA as the world’s largest mobile phone market, with sales forecasted at USD 87 billion. In the 2nd quarter of 2014, mobile phone shipments in China accounted for 37% of the global aggregate, and it is predicted that over 440 million mobile phones will be sold in China in 2014. 395 million of these handsets will be smartphones, which is 31.5% of expected global sales. Recent growth in the Chinese mobile phone market has been spurred by consumers switching to 3G and 4G smartphones. This change towards more sophisticated products will only continue in the future, as 70% of China Mobile clients still use 2G. Overall, though, growth is expected to be much lower next year as the market becomes increasingly saturated, with growth in revenues forecasted at 10% only.
Who are the largest manufacturers on the Chinese mobile phone market?
Xiaomi, a newcomer founded in 2010, is since early 2014 the largest manufacturer of mobile phones in China with its 14% share of the market. Samsung, the biggest mobile phone producer in the world, now occupies the second market share (12%). Samsung has done particularly well in China thanks to relatively cheap prices, frequent product releases, and a large product range. Nevertheless, Samsung and other foreign companies’ influence in China is declining year by year as the market share of Chinese companies continues to rise. Local companies benefit from cheaper production costs, a close partnership with local operators, and have a considerable advantage when it comes to providing applications tailored to Chinese consumers. With 13 million shipments in China in the second quarter of 2014, Lenovo is currently the 3rd biggest manufacturer operating on the Chinese market.
Chinese companies have benefited from the increasing desire of Chinese consumers to access the Internet, and have successfully transited towards the 3G and 4G industries. In fact, four out of the top five 3G smartphone manufacturers in China are Chinese: Lenovo (2nd), Coolpad (3rd), Huawei (4th) and ZTE (5th). However, the expansion of Chinese mobile phone producers now extends well beyond the ‘Middle Kingdom’. Indeed, half of the top ten world manufacturers are now Chinese: Huawei (3rd), Lenovo (4th), Xiaomi (6th), Yulong (8th) and ZTE (9th). In this respect, Huawei’s performance has been particularly impressive. Huawei now occupies 6.9% of the global market, rising from 4.3% the year before, and expects to sell 80 million mobile phones this year.
What are Chinese consumers looking for?
Chinese consumers are looking for good value for money, yet they also like strong brands and value customer care. The Chinese market is characterized by a strong preference for smartphones, which currently account for 93% of mobile phone sales. At the moment, China hosts 618 million Internet users, 80% of whom access the Internet via their cell phone. This drives the demand for smartphones. In fact, many consumers in 3rd and 4th tier cities have never owned a computer. It is consequently particularly interesting for them to own a smartphone, which allows them to gain access to the Internet and its diverse services. In fact, 58% of China’s 780 million smartphones are owned by residents of the 3rd tier and lower cities. Rural cities are therefore the biggest market for manufacturers at the moment. In such areas, salaries are typically much lower and so the market is much larger for cheap smartphones than for high-end products. In Tier 1 cities, on the other hand, consumers are very much attracted to sophisticated devices with a luxurious brand image, such as the iPhone.
In addition, Chinese consumers tend to prefer handsets with larger display screens, and in China phones with 5”+ screens represent 39% of the market. Samsung is by far the leader in this area (53% of sales at 5.5” and above displays). Yet other companies, such as Huawei, Lenovo, LG and Sony have successfully started producing these types of smartphones. However, the demand for large screens in China has constituted a serious problem for Apple, which does not produce a phone with a large screen (5”+). This partly explains why Apple had only managed to capture 4.7% of the Chinese market for 3G smartphones in the second quarter of 2013. Apple is doing slightly better at present, and its iPhone 5s is the most popular iPhone yet. Its golden color version sells exceptionally well on the Chinese market. In fact, iPhone sales increased by 58% in China the second quarter this year, thanks to a contract deal with China Mobile. Apple is particularly successful on the 4G market and accounts for half of China Mobile’s 2.8 million 4G subscribers. To further increase its presence in China, Apple is planning to triple the number of Apple retail stores in the next two years. To adapt to the Chinese market and compete with local companies, foreign manufacturers must still lower their retail price. So far, Samsung has been the best at producing phones that are ‘good enough’, i.e. products that are relatively sophisticated but can be sold at affordable prices. Such handsets are the most appropriate for China’s populous group of midlevel consumers.