Apple, Samsung's new challenge in China

Last year, when China quietly passed the United States as the largest smartphone market, the dynamics of global phone making shifted. 

Until then, the global market for smartphones had been defined by the rivalry between Apple and Samsung Electronics. They built expensive phones as must-have products for affluent consumers in wealthy countries. 

Now more phones are being designed for consumers in emerging markets, who are expected to account for most of the growth in smartphone sales in the future. That presents an opportunity for the major Chinese phone makers,Huawei, Lenovo, ZTE, Coolpad, Xiaomi and Oppo. 

While Samsung is the biggest smartphone vendor in China, with a market share of 20 per cent in the first quarter of 2013, according to the research firm Canalys, several Chinese companies have surged past Apple, which holds 8 per cent. 

These include internationally recognized namesHuawei, known for network switching gear, and Lenovo, known for ThinkPad laptops, which moved into the No. 3 and No. 4 positions in the first quarter. But there are nearly 400 other little-known makers in China,two-thirds of the world's smartphones are made. One of these, Coolpad, leapfroggedseventh place a year ago to second in the first three months of this year, with a 10 percent share. 

"There's a long tail of local competitors that are going to push Apple and Samsung harder and harder," said Neil Mawston, an analyst at Strategy Analytics. "There's a million and one people trying to eat their lunch." 

Chinese phone shoppers are concerned about price because most phones are sold without subsidiesnetwork operators. In the United States and Europe, the wide use of subsidies masks what consumers pay for phones. 

The Chinese also switch phones far more often than their counterparts in the West - generally after about six months, analysts say, compared with every two years or so in developed economies. Fickle customers mean market share shifts swiftly, and the fortunes of companies rise and fall almost as fast. 

Apple's and Samsung's position in the high end of the market allows them to collect most of the profitsmartphone sales in China, analysts say. Apple sells 55 per cent of the phones priced at $450 or more, with Samsung accounting for 40 per cent, according to Sanford C Bernstein, a brokerage firm. Apple's iPhone 5 costs about $780, while Samsung's Galaxy S4 costs about $850. 

But growth in this segment is slowing. Analysts at Bernstein expect sales of smartphones $450 and up in China to rise to 296 million units this year,235 million in 2012. But the total will flatten out at around 300 million a year, the firm said. 

By contrast, sales of phones priced at less than $200 are expected to surge to 400 million units this year,234 million last year, with a further jump to 685 million in 2015, the firm says. The low end is growing faster because prices of smartphones have fallen so much that hundreds of millions of Chinese consumers are now able to replace old-fashioned feature phones that lack mobile data capabilities. 

"The question for Samsung and Apple is whether they are equipped to compete in the developing markets, especially China,the growth is going to happen," said Pete Cunningham, an analyst at Canalys. 

Some of these phones are simply knockoffs of handsetsSamsung or Apple, often housed in cheap plastic shells or offering less memory, lower-resolution screens or inferior cameras. Last year, one Chinese brand, Goophone, introduced a clone of the iPhone 5 for $150, even before Apple released the iPhone 5 in China. 

It bears a resemblance to Apple's phone, but the Goophone i5 is different in an important respect - it runs on a version of Google's Android software. 

The challenge for the Chinese makers is to go global. Coolpad began selling its Quattro 4G in the United States through MetroPCS, a mobile network operator. It drew mixed reviews in the United States, but it sold for less than $100 under some promotions. 

Huawei, a Chinese company with revenue of 220 billion renminbi ($35.8 billion) last year, has big ambitions for international markets. In June, it introduced a phone called the Ascend P6 in London. The P6 includes many Apple and Samsung-style features,packed into a thin 6-millimeter case. The Ascend P6 lacks the ability to use the fastest new mobile networks, 4G technology, but it costs much less than an iPhone 5 or a Galaxy S4. In China it costs about $430. 

Huawei said it planned to sell the phone in 100 countries, including China and many European markets. But, at least for now, it will not sell it in the United States,the company has been labeled a security risk by Congress because of allegations - vehemently denied by the company - of possible links to the Chinese army. 

Analysts have been predicting that Apple will need to start selling a cheaper phone, though the company has been typically silent about its plans. If Apple wants to maintain its share, it "will have to move down market," said Mark Newman, an analyst at Sanford C Bernstein in Hong Kong. 

Apple has been negotiating with China Mobile to sell iPhones. If it succeeds in landing the largest wireless carrier in China, the company should easily increase its sales volume. 

Timothy D Cook, Apple's chief executive, said in April that the company planned to double the number of Apple stores in China - it has 11 - over the next two years. "We still see a significant opportunity in China," Cook told analysts. 

Analysts say Samsung is somewhat better positioned than Apple to take advantage of the expected surge in sales of cheaper smartphones, because it already sells a broader range of handsets in China, including three priced at less than $450: Galaxy Grand at 2,700 renminbi ($440), Galaxy Style at 1,700 renminbi ($277) and Galaxy Trend, which starts at 900 renminbi ($146). 

Samsung declined to discuss its strategy for China, saying only that it planned to introduce "various products that meet consumer needs in the future." 

What happens in China is also important because success there could help smaller companies develop the strength to move into emerging markets around the globe. While most smartphones are made in China, Chinese handset makers have so far struggled to export phones under their own brand names. 

"The fear for Apple and Samsung is that if they don't maintain a strong position in China, other players, mostly Chinese players, will do that instead, and then use that as a springboard to attack them in other markets," said Ian Fogg, an analyst at IHS.