Active Stocks
Thu Mar 28 2024 14:49:26
  1. Tata Steel share price
  2. 155.95 2.03%
  1. HDFC Bank share price
  2. 1,455.55 1.03%
  1. ITC share price
  2. 430.95 0.69%
  1. Power Grid Corporation Of India share price
  2. 278.75 2.84%
  1. State Bank Of India share price
  2. 756.00 2.99%
Business News/ Companies / Apple sounds warning bell for smartphone industry
BackBack

Apple sounds warning bell for smartphone industry

Apple sounds warning bell for smartphone industry

Premium


New York: If Apple Inc’s weaker-than-expected quarterly result is anything to go by, the global smartphone industry is a lot more vulnerable to economic shocks these days than during the 2008-2009 financial crisis.

In developed markets, every other person already owns a smartphone. In emerging markets, penetration rates are much lower, but cheaper phones that cost under $100 are squeezing profit margins.

That was not the case during the last recession, when Apple’s iPhone and Google Inc’s Android were still in their infancy. Smartphone demand remained strong even as sales of other electronics declined because consumers felt it was worthwhile to upgrade to a device with so much to more to give - touchscreens, email and full Web browsers.

That was evident from Apple’s June quarterly results, which showed a much bigger hit from the European debt crisis than Wall Street expected.

“The economy is having an impact on all electronic goods. Even Apple, which did defy gravity in the last recession, is not escaping now," said Hudson Square Research analyst Daniel Ernst.

Smartphone users, who typically upgrade their phones every 18 to 24 months, are now holding on for three months longer than usual, according to Gartner analyst Carolina Milanesi.

“The reason to upgrade is less urgent" she said.

Price pressure

Overall smartphone shipments rose 32% in the second quarter, their slowest pace since 2009’s 16 percent increase, according to Strategy Analytics. The research firm forecast annual smartphone shipment growth would slow to 40% in 2012 from 68 percent in 2011 and ease further to 23% in 2013.

Analysts say demand from emerging markets will support smartphone shipments even if the global economy takes a turn for the worse, but a growing supply of lower price devices from vendors such as Huawei Technologies Co Ltd and ZTE Corp will pressure prices even if the economy improves.

“We’re forecasting ASPs (average selling prices) to dip in 2013 and accelerate from there on," said Strategy Analytics analyst Neil Mawston. “If the economy continues to flat line or dip that will accelerate the move to lower cost models."

The popularity of Apple’s iPhone and Samsung Electronics Co Ltd’s Galaxy S will give these companies some pricing insulation, analysts said.

But there could be much more pressure for price cuts at already struggling smartphone vendors, such as LG Electronics Inc, HTC Corp, Nokia Oyj and BlackBerry maker Research In Motion Ltd.

“Apple and Samsung’s ownership of the high-tier and intense price erosion means the fight among others will be cutthroat," said CCS Insight analyst Geoff Blaber.

The tough road ahead for smaller vendors became more apparent this week, when market leader Samsung reported its best quarterly smartphone sales in history as it outsold Apple and won customers from smaller rivals. Samsung’s bigger size allowed it to drive down costs and still make a profit on phones that would generate a loss for smaller rivals.

Some of Apple’s earnings miss was attributed to consumers postponing purchases in anticipation of a new iPhone model hitting store shelves this fall. LG did not have that excuse - its cellphone division, which accounts for around one-fifth of sales, posted a quarterly loss as competition forced LG to spend more on marketing for cheaper phones.

Less purchasing power

According to Gartner, about 35% of an estimated 1.9 billion cellphones sold this year will be smartphones. Between 20% and 25% of people in the world already own smartphones, with the penetration rate rising to 50% to 55% in the United States.

“The first wave is selling expensive models to affluent buyers. The second wave is selling lower cost models to less affluent buyers," Strategy Analytic’s Mawston said.

Gartner’s Milanesi said Huawei and ZTE are in the best position among the lower-tier smartphone vendors.

“If price is the first driver I’m going to pick the Chinese," said Milanesi, who said LG and HTC are most vulnerable to price declines as they “need more to stand out."

Also putting pressure on handset makers are the wireless service providers on which they are heavily dependent in many regions such as Europe and the United States for promotions. Carriers often subsidize phones to encourage their customers to commit to long term contracts.

In Europe, some operators such as Telefonica have been dropping subsidies entirely. The top three U.S. operators, Verizon Wireless, AT&T Inc and Sprint Nextel Corp have all been improving profit margins because they cut down on their subsidy costs by offering customers upgrades less frequently.

If consumers do have to cut spending because if the weak economy, IDC analyst Ramon Llamas said: “There’s smartphone available for just about every single budget out there."

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 29 Jul 2012, 06:08 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie