China to contribute one-third of smartphone growth

Driven by local brands and low prices, China will continue to drive global smartphone growth this year and account for over one-third of worldwide increase in unit shipment.

In a report released Tuesday, research firm Canalys pointed to entry-level devices as a major growth driver in the Chinese market, with sub-US$200 models projected to account for over 40 percent of the market by 2015 from 25 percent this year.

Already the world's largest smartphone market, China will see its local brands play an increasing important role especially in the lower price points. Canalys added this market segment also will see competition intensify with the entrance of major Chinese Internet companies such as Baidu and Alibaba.

Baidu last month confirmed plans to launch a low-cost smartphone manufactured by Foxconn, while Alibaba would unveil its K-Touch Cloud-Smart Phone W700 in end-July.

"Price erosion is accelerating," said Nicole Peng, Canalys' research director for China, who is based in Shaghai. "New low-cost models, such as the Lenovo A65, have come to market at around 700 RMB (US$110). In fourth-quarter last year, devices with a similar specification were priced around 1,000 RMB (US$158)."

"'We are also seeing more local brands enter the smartphone arena and they represent a growing force for competition against international vendors," Peng added. "Established mobile phonemakers, such as Yulong, Gionee and K-Touch, have the advantages of strong operator relationships and channels. In addition, emerging vendors like Xiaomi and Green Orange are building a reputation quickly in the youth market."

According to Canalys Chinese mobile operators also outlined new minimum hardware specs for smartphone procurement, a move which further drove down device prices. China Unicom, for instance, earlier this year mandated 1,000 RMB smartphones under its distribution must have at least a 4-inch display and 1GHz processor. This was a change from the 3.5-inch screen and 600MHz processor stated in the operator's specs in third-quarter last year.

Other market players in China recently also unveiled plans to launch smartphones via partnerships with local handset makers, the research firm said, referring to security software vendor Qihoo 360 and online games player Shanda Interactive.

While still in their nascent stage, these major Chinese players will intensify pricing pressures particularly in the entry-level handset segment as they tap advertising and service revenues to offer smartphone subsidies, noted Rachel Lashford, Canalys' managing director for Asia-Pacific and mobile.

"Online retailers will also become more important as these Internet players seek to leverage their strong online marketing capabilities to promote their devices," Lashford added.

Global market players, however, will remain strong in the high-end segment.

Peng said: "Vendors such as Samsung, Apple and HTC should continue to dominate in the space above 2,500 RMB (US$400) [which] will still account for almost two-third of shipment value in 2016. Leading local tier-one brands such as Huawei and ZTE are diversifying beyond the entry-level by launching a number of high-profile, flagship smartphones, but it will require significant marketing and brand investment to deliver a significant return and this will take a long time.

"Product innovation is the best route for local brands seeking to increase share in higher-value segments, and we are yet to see the radical moves needed here," she said.