BMI View: Smart-enough low cost smartphones have been the rage in emerging markets such as Vietnam, India and Cambodia. But evidence suggests the low-cost smartphone providers from China and India are now spreading to developed countries as well. Unless a radical smartphone innovation takes place, the domination of premium smartphone in developed countries may soon come to an end.
Low cost smart-enough phones in emerging markets are nothing new. In India, Micromax and Karbonn Mobile dominate handset market shares. In China, budget handset makers such as Xiaomi, Lenovo and Yulong which sell for less than US$50 are making international brands like Nokia and LG look overpriced. In Q313, Xiaomi overtook Apple for market share in China.
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The rise of low cost smartphone providers such as Xiaomi has been rapid in recent years. Apple was able to hold the initial lead in the smartphone market because the iPhone's sleek design and high functionality was seen as a major differentiator from competitors' offerings. Over time, imitators such as Xiaomi have entered the market and their seamless user interface, broad selection of Android applications and significantly cheaper price points have started to win over consumers in China. Unless premium handset makers start to introduce truly differentiable feature, BMI postulates cheaper smartphone makers like Xiaomi will continue to increase their hold over the Chinese market.
And significantly, the popularity of these handsets is spreading to developed markets. In January 2014, incumbent operator PCCW agreed to become the first distributor of Xiaomi handsets in Hong Kong. The business strategy is clear: to target the lower cost handset market favoured by 2G subscribers to foster migration to higher value 3G plans. The popularity of these low-cost smartphones is evident from the 10,000 units sold through PCCW HKT channels within 36 seconds of launch. Besides Hong Kong, Xiaomi also entered Taiwan and Singapore through similar partnerships with high-profile operators in January 2014.
Previously, we have highlighted handset subsidies as a major problem facing operators today (see 'Operators Need To Take A Closer Look At Handset Subsidies', January 7 2013). Low-cost smartphones reduce the need to provide huge subsidies and present lower financial risks for operators. For premium handset makers, they risk losing their market share over time, a trend we predict is likely to happen without any new innovations, but the churn rate would vary across developed countries depending on the spending power of the average population. In short, a more prosperous nation is likely to see a slower rate of migration towards low-cost smartphones vis-à-vis a lower GDP per capita.