Apple & Samsung face slowing market growth in China

Jul 18, 2014

In the quest to topple Samsung and Apple in China, local phone makers appear to have a powerful friend in the Chinese government. Several moves over the last year are helping to propel Chinese hardware companies at the expense of foreign giants.

The loudest effort comes from state-owned broadcaster China Central Television, which has accused Apple and Samsung Electronics of shoddy hardware, poor customer service and electronic spying that may make Chinese consumers wary of buying their products. But there's also quiet maneuvering that could yank the wheels off the premium smartphone model underlying the Apple-Samsung profit machine.

China is an important country for any global gadget company. Beyond being the world's largest mobile market, it continues to post strong growth in smartphone shipments. While China's 31 percent growth in the first quarter represents a slowdown, according to IDC data, it still outpaces developed markets. Shipments in China are about six times larger than the next-closest BRIC country, India. Apple didn't respond to a request for comment, and Samsung declined to comment.

But the size of China's market means that even slight changes in government policy or consumer demands can affect the outcome of a $189 billion company's earnings. Samsung posted its third consecutive quarterly drop in operating income last week. In a statement, the company pointed the finger at one country in particular, reasoning that "the second quarter is a seasonally weak period for smartphone demand in China."

There is one development that's widely expected to help Apple and Samsung. The long-awaited deployment of faster 4G cellular networks throughout China should stoke demand for higher-end devices that support it. The two largest global smartphone makers have already adopted the technology. Some local manufacturers haven't, though they've certainly had time to catch up.

Smartphones from the California-based company and South Korean electronics giant are popular with Chinese shoppers. Samsung has the biggest share of the market, while Apple is in fifth place behind Xiaomi, according to IDC. Apple has long trotted China out as a growth story for the company, and it opened the 10th Apple Store there in January. Meanwhile, Samsung has been working on manicuring its image in China with a series of brand advertising campaigns (as opposed to product ads). In light of recent news, they might want to do more.

The government ordered the three state-owned wireless carriers to reduce expenses on subsidies and ads for devices such as the iPhone, Bloomberg News reported last week. Apple and Samsung have collected huge profits by getting carriers to eat the high costs of their phones in order to attract subscribers — a standard model in the U.S. and one that has begun taking hold in some Chinese cities. The carriers were told to reduce promotional spending by a combined 40 billion yuan ($6.4 billion) over the next three years.

This reduction in marketing and subsidies could benefit Lenovo, Coolpad and Huawei, which tend to produce cheaper, lower-margin devices to grab market share. (It's working, by the way.) Xiaomi sells high-end hardware at low prices and tries to make up for it by selling services on the phone. Xiaomi's marketing is done almost entirely online and through fan conventions. (This is also working.)

Foreign tech companies may also want to invest more in ads to combat the browbeating from the government-controlled news outlets. In CCTV's annual consumer rights program last year, the network criticized Apple's warranty and repair policies in China. The People's Daily, the official newspaper of the Chinese Communist Party, followed with articles, including a commentary titled "Destroy Apple's 'Incomparable' Arrogance." Tim Cook issued an apology on the company's Chinese website, and the chief executive officer offered full replacements of older iPhones experiencing problems.

A few months later, CCTV went after Samsung. The network claimed that the company's flagship phones, the Galaxy S and Note, are crashing as many as 30 times a day due to faulty memory chips. The report cited a mobile-phone repairman it didn’t identify. Similar problems can probably be found in many low-end Chinese phones, but CCTV has spared local companies from the same sort of scrutiny. Regardless, Samsung said it was sorry and promised free maintenance for broken phones.

"The Chinese government is trying to bring consumer sights back to domestic companies,” Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management, told Bloomberg News at the time. "They know it’s necessary to foster local companies to ensure stable economic growth."

CCTV turned its attention back to Apple last week. The broadcaster claimed a feature of the iPhone tracks users' locations and poses a national security risk. Apple said the accusations were untrue. Last month, a commentary on the microblog of the People’s Daily newspaper said Apple, Microsoft, Google and Facebook cooperated in a secret U.S. program to monitor China.

The seemingly uneven playing field in China also happens outside of the mobile industry. Google and Facebook aren't allowed by the country's censors. China began blocking foreign online messaging apps, including KakaoTalk and Line, earlier this month, according to Yonhap News. That's good news for Tencent, which owns the country's dominant platform WeChat. The government has also made the country an inhospitable place for Amazon and other foreign e-commerce companies to do business. Now, Alibaba could hold the largest initial public offering the U.S. has ever seen.
 

Maybe Xiaomi will be next.

Source: Bloomberg