Let the next smartphone battle begin

Firms should focus on higher profit margins rather than boosting shipments, say experts

Premier Li Keqiang's first trip of 2015, to the headquarters of smartphone giant Huawei Technologies Co Ltd in Shenzhen, Guangdong province, sent the world a clear message of the importance attached to the country's domestic handset industry.

But as local vendors continue to take on established industry heavyweights such as Apple Inc and Samsung Electronics Co, experts are warning of a less-profitable market in 2015 and beyond, and suggesting that many should focus on higher profit margins rather than simply increasing shipments.

The southern metropolis of Shenzhen is considered the world's biggest hub for smartphone manufacture. According to a report from the Xinhua News Agency, the premier praised Huawei's research and development power, saying the company's structural reform had been instrumental in fueling its innovation upgrading.

Known as an enterprise-level telecom equipment maker over the past decade, Huawei has expanded quickly into a top-five smartphone maker in China, and is now ahead of Apple in market share, according to research firm Analysys International.

Its smartphone sales jumped by almost a third to $11.8 billion last year with annual shipments hitting 75 million, according to Reuters.

Xiaomi Corp, Lenovo Group Ltd and a number of local affordable gadget manufacturers are already outperforming global industry giants such as Samsung and Apple in China, which is expected to remain the world's largest consumer of smartphones despite slower growth rates this year.

Despite these rising shipments of goods, however, many Chinese companies are still operating under threadbare profit margins, analysts said.

Compared with Samsung and Apple, who both still enjoy solid double-digit margins, local players such as Xiaomi are studiously avoiding the subject of profitability, said Bryan Wang, principal analyst and country manager for China at Forrester Research Inc.

Xiaomi, a red-hot hardware company right on track to become the country's biggest smartphone provider by market share, has trumpeted how it sold more than 61 million smartphones in 2014, a surge of 227 percent year-on-year. Gross sales hit 74.3 billion yuan ($12 billion), more than double the 2013 figure.

But figures within a statement ahead of Xiaomi's 1.27 billion yuan investment in home appliance company Midea Group Co Ltd, showed its 2013 profit margin was less than 2 percent.

Although the company－now valued at $45 billion, the highest among all technology startups－later acknowledged the investment was made by a Xiaomi subsidiary and the profit disclosed does not represent the company's total, analysts believe the Chinese company will not enjoy double-digit, or even high-single-digit margins over the next few years.

Investors favor Xiaomi mainly based on its ambitions in the smart home and entertainment sectors rather than its impressive smartphone sales, analysts say.

"Xiaomi is currently the only company in China trying to build an entire ecosystem around consumers' content needs. It has launched multiple products over the past 18 months including home media gateway Xiaomi TV, tablets, as well as investments in smart home ventures," according to Wang from Forrester Research.

"The company certainly has first-mover advantage, as Google and Apple are unable to offer their entire portfolio in China."

China's mid-end market will be a fierce battleground for Chinese smartphones makers in 2015, anxious to lift their profit margins, said James Yan, a researcher at Beijing-based consultancy IDC China.

Devices priced at around 2,000 yuan will be everyone's focus because that level can bring in larger profits and overseas companies have relatively weaker presence, according to IDC.

Forrester Research is predicting there will be 621 million smartphone subscribers in China by 2017 with fourth-generation devices continuing to dominate.