Asia makers’ smartphone margins are expected to decline in the medium term as competition increases and handsets become more commoditised.
Fitch Ratings said the pace of hardware development is slowing with more makers able to produce quality handsets, which has led to the entry of new lower-cost producers that are challenging market-leading incumbents and reducing profitability.
The smartphone industry, it said, runs the risk of following the cycle seen in PCs, where device-makers’ share of the value chain was squeezed by competition and where operating systems and applications software have become more important to consumers than hardware from a specific manufacturer. The dominance of Microsoft’s operating systems and applications enabled this trend in PCs. In smartphones, this trend is being facilitated by the Android operating system and the open environment for third-party application developers.
Fitch thinks that the smartphone market will consolidate in the long term as hardware becomes commoditised, with manufacturers focusing increasingly on hardware as a medium for mobile commerce and a distribution channel for software and applications.
Apple aims to expand Apple Pay as a mobile payment system, while Amazon is targeting its Fire Phone to drive e-commerce. China-based Xiaomi, which became the third-largest smartphone vendor in Q3, is competing with traditional vendors by selling cheap high-spec phones online. But its strategy over the longer-term is to monetise its user base through applications and other services.
As second- and third-tier manufacturers’ hardware improves, the product offering of market leaders such as Apple and Samsung will need to lean more heavily on brand and software. Of the big two, Apple has advantages in both these areas — a stronger brand, its own operating system and a stronger ecosystem to link to other consumer products. However, Fitch expects both to lose market share as lower-cost manufacturers have advantages in emerging markets.
Without the ability to differentiate their products through software or cutting-edge hardware designs, most smartphone manufacturers will have to compete on brand and price.
Fitch expects that Samsung’s credit profile will remain solid, given its technology leadership, integrated structure and wider product range. Apple too is relatively well positioned owing to its strong brand value and ecosystem. Outside the big two, established brands such as LG Electronics, Sony, HTC and Nokia will face stiffer competition from low-cost Chinese vendors.