Credit: Visual China

BEIJING, October 17 (TMTPost) – China's smartphone market had received little attention, until the recent release of a new product.

On September 1, 2023, Huawei began the pre-sale of the Mate 60 Pro without any official pre-launch promotion. The pre-sale was through two channels, with online sales involving pre-orders through the Huawei store, and offline sales taking place in a few stores in Shenzhen. According to public data, on September 1, the total sales of Huawei Mate 60 Pro through both online and offline channels reached approximately 800,000 units, setting multiple historical records for Huawei smartphones.

Huawei did not disclose the details of the components of the Mate 60 Pro. Even in the latest autumn product launch event, Huawei's Executive Director and Consumer Business Group CEO Yu Chengdong did not disclose any product details.

However, according to reports from many organizations, basically all the components of this phone are made in China. At the same time, the Mate 60 Pro's transmission speed is as fast as the latest iPhone 5G, and in some cases, the download and upload speeds even exceed those of the iPhone.

This means that Huawei has regained its 5G capabilities in the smartphone market.

It has been 1,083 days since the U.S. government banned Huawei from obtaining chips through commercial channels on September 15, 2020. For Huawei, its difficult times have now passed. But for the entire smartphone industry, struggles are still the norm.

Consumer behavior is changing. Financial statistics from China’s central bank show that in 2022, Chinese people deposited 17.84 trillion yuan in banks, an increase of 7.94 trillion yuan compared with the previous year. Counterpoint data also indicates that the replacement cycle for smartphones in 2022 extended to 43 months, reaching a historical high.

Supply chain strategy: From open to closed

The semiconductor supply chain was once considered an exemplification of global cooperation.

In the three major links of the chip production, Europe and the U.S. excelled in the innovative design, while Asia was strong in manufacturing and packaging testing. Specifically, the U.S. contributed 74% of the added value in EDA/IP, 67% in chip design - logic. Japan had high percentages in global chip design - DAO, semiconductor manufacturing equipment, and semiconductor materials, and Chinese mainland had high percentages in global wafer manufacturing - post-channel - packaging, and test value-added.

Scholars like Thomas Friedman believed that economic interdependence would bring peace and prosperity. With the division of labor in the global market, chip performance continued to advance, allowing global consumers to have new technology products at lower prices, with smartphones being a prime example.

However, as the U.S. began comprehensive sanctions against Huawei, this interdependence gradually became weaponized.

The U.S. was able to do this because there are key links in the global economy. Globalization did not create a decentralized global market, as scholars and politicians had expected. Instead, it systematically concentrated power in the hands of a few large companies. In the semiconductor production field, such companies include ASML, Nvidia, Synopsys, and Cadence Design Systems. This is why export controls have been so effective.

On May 15, 2020, the U.S. Department of Commerce issued a ban, stating that any company providing Huawei with semiconductor products containing U.S. technology would require prior approval from the U.S. government. There was a 120-day grace period before the ban took effect, with September 14 being the last day of the period.

Subsequently, major chip manufacturers such as TSMC, Intel, Qualcomm, MediaTek, Micron, and others announced that they would no longer supply Huawei after September 14. This meant that from September 15, 2020, Huawei could not obtain 5G chips through any commercial channels. Before the ban, in the second quarter of 2020, Huawei's smartphone shipments exceeded Samsung's, becoming the world's top-selling smartphone brand for the first time.

"This fall, Huawei will release the next-generation flagship smartphone, the Mate 40, which will be equipped with Huawei's self-developed Kirin 9000 chip," Yu said after the sanction. This may be the last generation of high-end Kirin chips because, due to the second round of sanctions, chip production was impossible. According to IDC's global smartphone shipment data, Huawei's smartphone shipments in 2020 were 189 million units, a decrease of 21.5% compared to the previous year, ranking third and falling one place from the previous year.

To adapt to the increasingly closed supply chain model, Chinese smartphone manufacturers have also begun independent research and development with a focus on security, attempting to use a larger proportion of components produced in China.

According to the latest data from the international market research firm Omdia, in the second quarter of 2023, Chinese manufacturers' market share in the production of smartphone screens has successfully surpassed the industry leader Samsung. Currently, the market share of Chinese screen manufacturers has exceeded 50%, with BOE, Tianma, Huaxing Optoelectronics, and Visionox holding market shares of 25.5%, 9.4%, 7.8%, and 7.5%, respectively.

Chinese smartphone manufacturers have also ushered in a wave of upsurge in self-developed chips. In September 2021, Vivo introduced its self-developed independent ISP chip V1 as a supplement to general processors to meet users' personalized shooting needs. In March 2021, Xiaomi launched the ISP chip Pengpai C1, followed by the fast charging chip Pengpai P1 and the battery management chip Pengpai G1, which together formed the Xiaomi Pengpai battery management system, achieving synergy between self-developed chips.

However, among smartphone manufacturers, only Apple, Google, Huawei, and Samsung have the capability to design SoC chips.

The reason Huawei's Mate 60 Pro attracted global attention is primarily because, under U.S. technology sanctions, Huawei successfully completed the design and large-scale production of its SoC chips. How Huawei achieved this "miraculous" breakthrough has yet to be determined, but it is clear that the semiconductor supply chain’s global cooperation has essentially ended.

Harsh winter of the smartphone market

The smartphone market entered a "cold winter" in 2022. While Huawei smartphones faced significant challenges amidst numerous sanctions, the overall smartphone market was rapidly heading into a downturn, with most manufacturers experiencing a year-long decline in sales.

Starting from the first quarter of 2022, according to CINNO Research, the overall sales volume of smartphones in the Chinese market dropped by more than 20% YoY in February. OPPO, Vivo, and Xiaomi saw declines of 45.7%, 38.6%, and 20.1% respectively.

Similarly, according to Wind data, in March 2022, Chinese smartphone market's shipment volume was 21.46 million units, a 40.5% YoY decline. Looking back ten years, in March 2012, the shipment volume was 395.86 million units. This means that the overall shipment volume of Chinese smartphone industry in the first quarter is now lower than that of the same period ten years ago.

As a result, smartphone manufacturers began reducing orders from the upstream supply chain. Apple analyst Ming-Chi Kuo at TF International Securities revealed, "Both high-end and low-end brands are reducing orders. The smartphone industry is undergoing structural adjustments. Major Chinese Android smartphone brands have cut approximately 170 million orders for 2022 (20% of the original plans)."

The primary reasons for this outcome are the following two: smartphones struggling to make innovations that extend consumers' replacement cycles to 28 months or longer and the decline in consumer purchase demand due to economic uncertainty.

According to financial statistics from the central bank, Chinese citizens deposited 17.84 trillion yuan in banks in 2022, an increase of 7.94 trillion yuan over the previous year. In the first half of 2023, household deposits continued to increase, up 11.9 trillion yuan, which was 1.6 trillion yuan more than the same period the previous year.

Under these pressures, Chinese smartphone manufacturers collectively entered a period of decline.

In the face of global economic uncertainty, Huawei founder Ren Zhengfei, in an internal forum, stated that due to the impact of war and the U.S. suppression, the world's economy will not improve in the next 3 to 5 years.

Based on this, Ren called for a change in Huawei's business policy, shifting from pursuing scale to pursuing profit and cash flow, to ensure the company's survival over the next three years. For 78-year-old Ren, this is one of his most stern statements in recent years. However, he believes that the environment today is different from when Huawei was hit in 2019.

In fact, aside from economic uncertainty, there are also changes in the overseas telecommunications environment for smartphones.

In January 2022, the Indian Ministry of Finance accused Xiaomi India of evading taxes of 6.53 billion rupees (approximately $78.43 million). The Indian Ministry of Finance stated that Xiaomi India imported Xiaomi smartphones and mobile phone components from overseas without reporting patent royalties and licensing fees included in the imported products in its customs declaration, violating India's customs laws.

In July, the Indian Enforcement Directorate conducted searches on Vivo and related companies' production and business premises in India on suspicion of "money laundering" and blocked approximately 390 million yuan in 119 related bank accounts of Vivo in India. Subsequently, the Indian Revenue Intelligence Directorate investigated OPPO for allegedly evading taxes of nearly 43.9 billion rupees (approximately $551 million).

As part of the tax evasion investigation, the Indian tax authorities conducted searches at various locations of Huawei in India in July and examined Huawei India's financial documents, account books, and company records. On the evening of July 21, Zhao Ming, CEO of Honor, stated that the Honor team has withdrawn from India and will conduct business in the Indian market in a "very prudent manner" in the future.

From various indications, India, once a magnet for Chinese smartphone brands, is undergoing changes. "In addition to the smartphone industry, Chinese enterprises in other fields, including home appliance manufacturing and industrial manufacturing, have also faced scrutiny from the Indian side," said Xiang Nan, a pseudonym, who does venture capital business in India. Currently, more than 500 Chinese enterprises are on the list of scrutiny in India.

According to Xiang, the core reason for India's scrutiny of Chinese smartphones is to promote Indian ones. That is one of India's national strategies and is mainly executed through two strategies.

One is the phased manufacturing plan. For example, in the early stages of the smartphone industry, the Indian government used various policy incentives to attract Chinese smartphone brands like Xiaomi, OPPO, and Vivo to enter the Indian market. Once the brands entered, India gradually increased the tariff rates on smartphone components, causing foreign smartphone supply chains to gradually shift to India. After several years of development, India now has a complete smartphone supply chain.

Under the influence of various adverse factors, the shipment volume of Chinese smartphones experienced a significant decline in 2022. According to IDC data, the total annual shipment volume of the Chinese smartphone market in 2022 was approximately 286 million units, a 13.2% YoY decrease, marking the largest decline in history. After a decade, the shipment volume of the Chinese smartphone market has fallen back to less than 300 million units.

When will the winter pass?

After enduring a year-long nightmare in 2022, the keywords for Chinese smartphone manufacturers in 2023 have become "recovery."

Firstly, Huawei has returned to the top five in the domestic market in the second quarter of 2023. According to IDC data, the top five smartphone manufacturers in China for 2023 Q2 are OPPO, vivo, Honor, Apple, and Xiaomi/Huawei, with market shares of 17.7%, 17.2%, 16.4%, 15.3%, and 13.1%/13.0%, respectively. (If two or more manufacturers have a revenue share or unit shipment difference of 0.1% or less, IDC will declare them tied in the ranking for the Chinese smartphone market.)

Among them, Huawei experienced the largest increase in market share, with a year-on-year growth of 76.1% in Q2 2023. IDC stated that, despite external limitations, Huawei maintained its position in the second place in the high-end market above $600 with the excellent performance of its new P60 series and the foldable Mate X3 series.

In addition, due to the exceptional performance of the Mate 60 series smartphones, Huawei raised its shipment target for the second half of the year by 20%, with a minimum of 40 million units of new Huawei phones expected to ship in the whole year. Huawei has already initiated a comprehensive plan to re-enter the smartphone market, focusing on the Chinese market first and the overseas market later.

Kuo stated that Huawei is expected to fully adopt its new Kirin processor in new smartphones starting in 2024. As a result, from 2024, Qualcomm’s SoC shipments for Chinese smartphone brands are expected to decrease by at least 50-60 million units compared to 2023 due to Huawei's adoption of the new Kirin processor.

Secondly, as the only publicly listed company among mainstream Chinese smartphone manufacturers, Xiaomi's financial situation is also improving. According to Xiaomi Group's 2023 mid-year performance data, in the second quarter, the company achieved revenue of 67.35 billion yuan, a 4% YoY decrease, and a net profit of 3.67 billion yuan, a 168.5% YoY increase. Its revenue declined but its net profit increased significantly, primarily due to cost reduction and efficiency improvement.

During the reporting period, Xiaomi's overall expenses in the second quarter were 10.2 billion yuan, a 2.3% YoY decrease, and the overall inventory amount decreased by 33.5% to 38.5 billion yuan, the lowest level in nearly 10 quarters. Previously, due to a rapid shift in semiconductor industry capacity from undersupply to oversupply and the overall downturn in the smartphone industry, Xiaomi accumulated a large amount of inventory, affecting its overall profit performance. After nearly a year of inventory clearance work, the compay’s inventory level has returned to normal.

Regarding the Indian market, Lu Weibing stated that Xiaomi's business in India has undergone significant changes, and he believes that the future will see remarkable improvements in Xiaomi's market share, product structure, and other indicators in the Indian market. As for the ongoing dispute over frozen funds with the Indian authorities, Lu believes that the litigation will take a relatively long time, but Xiaomi will not give up.

However, looking at the overall smartphone market, it remains in a challenging situation. In the Chinese market, the second quarter is important for smartphone manufacturers, and various smartphone brands choose to offer discounts during the "618" promotion (the second largest Shopping Festival in China). Nevertheless, despite the dual subsidies from manufacturers and e-commerce platforms and the substantial incentives provided, the year-on-year decline in smartphone sales still exceeds 5%, and consumer demand continues to remain weak.

According to IDC data, in the second quarter of 2023, the shipment volume of smartphones in the Chinese market was approximately 65.7 million units, a 2.1% YoY decrease, with the decline significantly narrowing. The shipment volume for the first half of the year was approximately 130 million units, a 7.4% YoY decrease. Compared to the historic decline of 13.2% YoY in 2022, the Chinese smartphone market had some respite in the first half of 2023, but it still has a long way to go before overall market demand recovers.

According to IDC, at present, basic consumer demand has not yet recovered, so there will not be a significant improvement in shipment volume for manufacturers and the upstream supply chain. The Chinese smartphone market remains in the doldrums, with no apparent improvement in market conditions except for Huawei.

(Note: 1 yuan equals U.S.$0.14.)

(This article was originally published on the TMTPost App. Reporting by Rao Xiangyu and editing by Zhong Yi)