By Sinead Carew and Tarmo Virki
July 29 If Apple Inc's (AAPL.O)
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
That was not the case during the last recession, when
Apple's iPhone and Google Inc's (GOOG.O) 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.
Without a technology breakthrough such as touchscreen - made
popular by the first iPhone in 2007 - people are in far less of
a hurry to upgrade their phones this time around, analysts said.
World smartphone shipments and economic growth
That was evident from Apple's June quarterly results, which
showed a much bigger hit from the European debt crisis than Wall
Street expected. [ID:nL2E8IP08M]
"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.
Overall smartphone shipments rose 32 percent 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 percent in
2012 from 68 percent in 2011 and ease further to 23 percent in
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 [HWT.UL] and ZTE Corp
(000063.SZ) 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 (005930.KS) 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 (066570.KS), HTC Corp (2498.TW), Nokia Oyj NOK1V.HE and
BlackBerry maker Research In Motion Ltd RIM.TO.
"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. [ID:nL4E8IQ95X]
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. [ID:nL4E8IN0NY]
LESS PURCHASING POWER
According to Gartner, about 35 percent of an estimated 1.9
billion cellphones sold this year will be smartphones. Between
20 percent and 25 percent of people in the world already own
smartphones, with the penetration rate rising to 50 percent to
55 percent 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 [ID:nL6E8FB56H]. The top three U.S.
operators, Verizon Wireless, AT&T Inc (T.N) and Sprint Nextel
Corp (S.N) have all been improving profit margins because they
cut down on their subsidy costs by offering customers upgrades
less frequently. [ID:nL2E8IO1V0]
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."
(Reporting by Sinead Carew in New York and Tarmo Virki in
Helsinki; editing by Tiffany Wu and Andre Grenon)
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Keywords: SMARTPHONES OUTLOOK
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