The China Smartphone Brand That's Beating Apple (Nasdaq: AAPL)

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Most investors who pour money into smartphone makers look to dominant players like Apple Inc. (Nasdaq: AAPL) – but they're missing a bigger part of the market.

The global smartphone industry is changing dramatically, as China surpassed the United States in 2012 to become the world's largest smartphone market by volume. Smartphone shipments to China in the third-quarter of 2012 hit a record 60 million.

Apple has noticed this shift. In fact, Apple CEO Tim Cook recently told Chinese-run Xinhua News Agency that he believes China will become the company's biggest market in the future.

But for now, it's the domestic brands that have won.

"Chinese brands have taken more than half the Chinese smartphone market this year, and they will take much more," Sandy Shen, the head of consumer research at technology research company Gartner in Shanghai, told the Financial Times.

Who's Beating Apple in China?

The main reason Apple isn't winning China – for now – is other companies offer more affordable products, meaning cheaper than Apple's iPhone.

The higher-end smartphones Apple produces end up being owned only by China's wealthiest smartphone buyers.

Research firm IDC estimates that in China in 2011, smartphones costing less than $200 made up 40% of shipments, while devices costing more than $700 accounted for just 11% of the market.

"The sweet spot of affordability in China is 800-1,500 yuan ($130-$240)," Michael Clendenin, managing director of Shanghai-based consultancy RedTech Advisors, told Reuters.

In China's smartphone market, one company in particular stands out as an option for these consumers. That's Lenovo Group Limited (LNVGY).

Lenovo is best known for its PCs and recently passed struggling Hewlett-Packard Co. (NYSE: HPQ) as the world's top PC company.

But Lenovo's shifting its focus to smartphones.

Lenovo's smartphone market share in China rose from just 1.7% in the third quarter of 2011 to 14.8% in the third quarter of 2012. Lenovo, led by its popular LePhones smartphone, surpassed Apple's 6.9% share of the Chinese market and trailed only Samsung Electronics Co., which uses the Android operating system from Google (Nasdaq: GOOG), with a 16.7% market share.

Lenovo's Move Into Smartphones

As the PC business fades, Lenovo management believes the company's future lies in smartphones and tablets and is re-positioning the firm.

Lenovo's smartphone segment is not yet a huge money-maker as PC sales still contribute 90% of total revenue, as of September, but Lenovo management said at a conference in November that it expects business to turn profitable "in the next few quarters."

Jonathan Ng, an analyst with CIMB in Singapore, told Reuters, "Obviously their cash cow is still going to be PCs, so they will use their PC business to expand into tablets and smartphones."

Lenovo is positioned at the mid to lower end of the market, right where the global brands are less competitive.

Another plus pushing up Lenovo's market share is the fact that its brand is a household name in China. Its nationwide distribution network is also much deeper and better established than those of its foreign competitors.

"So far in China, they have the advantage and they have been doing well over there," Ng told Reuters.

Revenue in Lenovo's mobile Internet and digital home division – which includes smartphones – more than doubled to $1.3 billion in the six months to September 2012.

Lenovo stock is up more than 30% over the past year, beating Apple stock's 19% rise.

Money Morning's devoted Apple follower David Zeiler recently outlined what has to happen for AAPL to climb again in 2013 – take a look at four things the company could do to help sales.

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