China’s 5G Challenge: Mid-Priced Phones

20 Nov

China’s 5G Challenge: Mid-Priced Phones

SIMON BAKER (Program Director)

China launched 5G services at the beginning of November. To establish a mass market, Chinese Android vendors need to bring prices down fast; to achieve that, prices will need to fall to less than half that of the first 5G models in South Korea, the early 5G market leader.

Initial services in China unsurprisingly focused on the capital, Beijing, and the richer cities of the East, including Shanghai, Guangzhou, and Hangzhou.

Chinese news agency Xinhua reported more than 80,000 5G base stations in use, and the three main operators — China Telecom, China Unicom and China Mobile — all unveiled 5G tariffs, the lowest of which start at around 128 yuan or $18 per month.

The launch is seven months behind the start of service in South Korea and the US, which happened at the same time.

What is not surprising, however, is why China should be behind, but to the contrary, why it has decided to be so close following on. The reason lies in the nature of the smartphone market, as data from IDC’s Worldwide Quarterly Mobile Phone Tracker shows.

Prices Need to Come Down to Below $400 Before Big Sales

The price of 5G smartphones in China will have to come down to below $400 before volume sales can really be expected. At current baseline prices of around $500, less than 10% of the Android market is in reach.

The top of the smartphone market in China is heavily skewed towards Apple, which has more than 9 in 10 sales over $400. That has a lot to do, one way round or the other, with the small China share of Samsung, which dominates premium Android globally.

A wave of nationalism may push more consumers to ditch iPhones for Chinese 5G devices, but any such shift is unlikely to produce big volumes. And with this year’s iPhone launches already done it looks as if it will be September next year before Apple has 5G models on the market.

And to become really mass market in China, Android phones will need to see prices of no more than $250.

Korea Is a Top-End Phone Market — China Is Not

5G has taken off fast in Korea; in the third quarter 5G devices represented almost half of the Korean market after reaching nearly 30% in 2Q. But in a completely different environment — the ASP dipped only marginally below a thousand dollars. Half of the Korean Android market lies above $700 retail before tax. In China it is 4% of Android.

With such a challenging price drop facing them to cope with, it is no surprise then that Chinese brands are showing a clear preference to focus on cheaper 5G models that will be sub-6GHz only.

Back With 4G, Within Two Years There Was a China Boom

When 4G got going in China seven years ago, there was also a price differential with the new technology. There weren’t a lot of smartphones sold in China above $275, while many of the 4G phones of the day cost $700 or more. 4G prices only dropped moderately the next year, but in 2014 they dropped fast.

It took a full two years before the Chinese 4G market began to blossom, but as prices began to really fall in 2015 it was a massive 419 million phones, or 43% of global 4G smartphone shipments (now it is 29%).

Xiaomi Puts Down a Low Price Marker

There is a strong dynamic to a big Chinese push in 5G. Huawei needs to keep its 5G momentum going against the headwinds in export markets caused by President Trump’s accusation that it represents a security risk to countries allied with the US.

If it continues to be frustrated abroad, Huawei will push more for a big new 5G replacement cycle at home, both in infrastructure and in smartphones.

The new wave Chinese players, Xiaomi, vivo and OPPO and One Plus, increasingly squeezed at home by Huawei, which as a state company has easy access to funds, will need to compete hard. Xiaomi has said it will launch 10 5G phones next year, and in mid-November put down a trademark low price marker, stating that all models above 2,000 yuan ($285) next year would be 5G.

5G Is a Tougher Sell

Nobody is expecting a boom like that this time round, and 5G in China faces the challenges it faces everywhere. The Chinese economy may be more than one half as big again than it was in 2012, but that growth is now slowing.

No one does deployment at scale like the Chinese. But that deployment nearly always comes with the push of the state. The three main mobile operators are state-controlled companies, meaning their executives are chosen by the state. Just in 2015 the state abruptly swapped the heads of China Unicom and China Telecom. The government might yet lean on them more in 5G.

Chinese Operators Don’t Seem Too Keen, but the State Will Decide

First indications are mixed. The Chinese operators are not keen on subsidising 5G smartphones, and they haven’t launched much in the way of promotions at the 5G kick-off. My Chinese colleagues researching the local market believe that they will focus on attracting 5G users with tariff plans that do not raise the cost of data over 4G.

On the other hand, China Daily said in mid-November that China Mobile, the biggest operator, aims to sell 100 million 5G smartphones next year – which alone would be a quarter of the domestic smartphone market.

Leveraging Home Advantage

The first phase this year of 5G development, in rich countries, has shown 5G can take off straightaway if the government and operators are behind it, and if the smartphone market is mainly premium. That has all come together in South Korea this year, but less so in the US and in Australia.

This second stage in 5G will be quite different in scale from the first, in the world’s largest smartphone market.

Rapid growth in China would have an impact in numerous other countries within a couple of years. When 4G took off in China the country was much more dependent on foreign brands. The boom changed the vendor landscape within the country; earlier popular domestic brands such as Coolpad fell, as did outsiders including Samsung and Sony.

Chinese new entrants steadily came to the fore, notably Xiaomi, OPPO and vivo, and these have now become the global brands we recognise today.

Moving fast down the 5G price curve at home will put them in a good position to carve out a new space with cheaper models in 5G in other countries, where the main competition will be Samsung and LG offering far higher price points — until they are forced to respond.

As 5G enters its second phase — a move into the middle income market — a lot depends on the kick start the Chinese state decides to apply.

 

 

If you want to learn more about this topic or have any questions, please contact Simon Baker or head over to https://uk.idc.com and drop your details in the form on the top right.

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