The smartphone boom in emerging markets

Date: Thu, 01/24/2013 - 13:01 Source: GfK press department

Over the past 18 months, China has seen monumental growth in smartphone sales representing a rapid shift of consumers away from feature phones. China has swiftly transformed itself into the world’s fastest-growing economy. Could the reasons behind the smartphone proliferation there be used to predict similar trends in other emerging markets?

The smartphone boom in emerging markets

Smartphone user in Beijing, China

Photographer Yang Qi Tao - Source GSMA & Decisive Media

In 2008, smartphones accounted for just 9 percent of all mobile phone sales in China. Indeed, despite being the world’s largest country, fewer than 200 million phones were sold every year. Move forward to 2012 and there has been a seismic shift in the market. With smartphone sales totaling 59 percent of the market and overall mobile phone sales boosted to 307 million, the Chinese smartphone market has seen a growth in sales of 108 percent in 2012. But what factors are behind this vast and sudden uptake of smartphones?

Change agents
Unsurprisingly, the key driver of change was price, with numerous elements combining to drive down the cost of both producing and buying smartphones. Local operators played a critical role in the first wave of smartphone growth in China through heavy subsidies, offering them at the symbolic retail price of CNY1,000 (circa €120) in September last year.
The second wave of growth is now led by domestic manufacturers who have started selling entry-level smartphones below CNY1,000. As their research and development into the design and manufacture of Android smartphones has started to pay dividends. Finally, high levels of competition in China’s well-established handsets supply chain have influenced a fall in costs across the component set, from application processors to screens and touch panels.
Competition was not, however, the only reason for price change. A move from 3G to 2.5G chipsets and 4-inch screens to 3.5-inch screens allowed for price reductions for consumers of between 20-30 percent while maintaining acceptable levels of quality. This has been vital in convincing a wider consumer base of the value of upgrading to smartphones. Smaller vendors in China’s tier-4 and tier-5 cities (county-level cities) have developed their own smartphone propositions, including landmark sub-CNY600 (circa €73) handsets – under half the price of entry-level smartphones sold by tier-1 vendors without subsidies.  
Nevertheless, despite such rapid market change, 2012 is likely to mark the end of such explosive growth in China. Our data indicates that unit growth will slow moderately this year and more rapidly thereafter.

Future growth markets
So where should we look for the next boom in smartphone purchasing? We’ve identified emerging markets such as India, The Philippines and Nigeria as the next growth markets for smartphone penetration. The opportunity for cheap smartphones to replace feature phones in these markets is huge: 95 percent of phones that consumers buy in India are below INR8,500 (equivalent to CNY1,000 or €122), compared to 45 percent in China.
Yet the lack of operator subsidies in these markets means that the smartphone category is not being supported in the same way that we see in markets such in Western European markets. As such, these low-priced smartphones are particularly critical for generating growth in the market and fuelling a switch from even lower-cost feature phones.
As Chinese and domestic manufacturers ramp up their production capabilities and tier-1 vendors start lowering smartphone prices further, we expect smartphone growth to accelerate in emerging markets from the end of this year and maintain elevated levels over the next two years.

Looking ahead
Of course, each emerging market will have its own local twist: smartphone sales in India, for example, should grow 95 percent in 2013 against only 46 percent in Brazil where import duties will constrain the cheaper supply effect. Looking ahead, manufacturers who are able to maintain a competitive edge in this new segment will secure a strong position in the future mobile phone market.

This article was originally published as part of GfK's technology magazine TechTalk:

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