China Economic News: Smartphones, China’s next great economic indicator

China Economic News: Smartphones, China’s next great economic indicator


Posted on January 14, 2013



China
has broken a new global record in smartphone penetration and this will
have dramatic effects on content and commerce in 2013 in the world’s
most populous internet market. Mobile subscribers in China are now using
330 million smartphones—which is a 150% increase over last year.
iiMedia, a Chinese research firm, recently released this smartphone
data, which has not been widely distributed in English.

China’s active smartphone now exceeds the
total number of all 321 million mobile phones active in the US. Kai-fu
Lee, the former lead China researcher at Microsoft (MSFT) and then
Google (GOOG), predicts that China will have 500 million smartphones in
use by the end of 2013. The implications of such a dramatic flip from
dumb-to-smart phones are far-reaching and will ultimately affect the
closely watched GDP growth rate in China. Those 500 million smartphone
users are going to drive new patterns of online and offline commerce
that will have global consequences. This is particularly relevant as
China attempts to increase the role of domestic consumption as a driver
of its GDP.

Smartphones are key to the future of internet usage, electronic
payments and product branding since relatively few people in China
access the web via traditional PCs. As the number of mobile internet
users grows, online services will undergo a significant transformation
with many new online services to be conceived of as mobile only. (See,
for instance, Fortune‘s Facebook’s China problem.) This will be
more pronounced in China where the penetration rate of laptops and
desktops per capita is far lower than the US. Smartphones will drive
brand awareness, pre-purchase research, price comparison, payments for
both online and in-person transactions, and social media distribution of
popular content.

MORE: 2013 is the year social TV takes off

Take China’s auto market, which sells more cars than any other
country. New models can quickly take off in sales if their manufacturers
target such mobile consumers. Pre-purchase research is critical in
car-buying and more of it will increasingly occur on smartphones.
Well-orchestrated social media, viral video and incentive campaigns can
bring customers into dealerships and translate into hundreds of
thousands of units in sales.

Smartphones are already helping brick-and-mortar stores in large
internet markets. In the US, $159 billion worth of goods bought in-store
were influenced by use of a smartphone during the purchase. By 2016,
consultancy Deloitte estimates that number will reach an eye-popping
$689 billion. Smart retailers are taking advantage of this phenomenon
by giving consumers additional coupons for scanning a bar code in-store
for one-time incentives. Big-box chains are still growing aggressively
across the China and those who targeting this growing mass of mobile
internet users will have a critical advantage over retailers who rely
only upon traditional marketing.

Not surprisingly, the app market in China is rapidly growing with the
rise of smartphone users. Tencent’s Wechat has now hit almost 300
million users, the majority of them in China. And Baidu (BIDU), the
leading Chinese search engine, has just released a new version of its
Siri-like voice app making it easier to search for both information and
locations while on the go. Taobao, one of the most popular ecommerce
sites in China, has an app for both iOS and Android allowing users to
preview and shop on their mobile devices. Taobao is a division of
Alibaba. Alibaba also offers Alipay which is similar to eBay’s (EBAY)
Paypal and will benefit greatly by this influx of smartphones.



Figure 1: Smartphone growth in China as of Q3 2012 (scale on left is
in hundreds of millions of smartphone units; scale on the right is
sequential quarterly growth rate).

The smartphone sector in China is also upending
traditional technology hierarchies. While Google is not a significant
player in search in China, it dominates the smartphone OS market.
Android maintains some 67% of market share to date in China. In
contrast, Apple’s (AAPL) iOS only holds 10% of the market. Google’s
success with Android in China may be somewhat of a Pyrrhic victory,
however, since most of the phones do not feature Google services that
have been banned in China. Instead these smartphones highlight services
from Google’s competitors.

MORE: 5 ways to save Best Buy from extinction

Apple’s Tim Cook, meanwhile, was in China recently and predicted
that it will be the company’s largest market within a few years. This
may be true, but Apple has a tough challenge unseating Android or even
coming close to its adoption levels in China. Apple may be able to
strengthen its position through cross-platform apps running on their
tablets and other devices. A killer Apple TV wouldn’t hurt either in a
country where internet bandwidth is growing quickly, and there is a
thirst for domestic and foreign TV content.



Figure 2: Smartphone operating systems market share in China.

In China, Samsung is set to edge out Nokia (NOK) within the next
quarter or two for the largest market share of smartphones. This will
put further pressure on the struggling company which is already under
attack in many of its global markets. Nokia is enjoying some success
with its Lumia smartphones in other markets which led to
better-than-expected earnings results, but it is losing ground in China.

MORE: How to avoid the next Sandy meltdown

Then there are the locals. Huawei, ZTE and Lenovo each command
between 6% and 8% of the Chinese smartphone market. A less well-known
entrant controlling 10% of the market is CoolPad which is a subsidiary
of Yulong/China Wireless and sold by China Unicom. The Coolpad
smartphones mimic many of the features of big brand phones at a lower
price point. Interestingly, Huawei, ZTE and Coolpad are all now vying
for a share of the US smartphone market. So far, Coolpad has been the
only one of the three to successfully launch its products in the US. All
four companies had significant presences at CES which wrapped up last
week.



Figure 3: Brand market share of smartphones as of Q3 2012.

So what does it all mean? The world is about to witness a unique
phenomenon this year. The largest single mobile consumer market is now
emerging. New online and offline consumption patterns will rapidly take
shape and brands that jump on this wave can change their market share in
a dramatic way.

By 2015, the number of smartphone users in China will exceed all
mobile users in the US and Europe combined. There are no precedents for
this kind of shift. As China turns its focus to domestic consumption,
the largest mobile consumer base will no doubt play a large role as an
economic driver. And that will have ripple effects around the world.


http://tech.fortune.cnn.com/2013/01/14/smartphones-chinas-next-great-economic-indicator/