Made in China: Four horsemen of the iPhone apocalypse

Today it's the $100 value handset. Tomorrow it will be the $200 premium smartphone. There's nothing left for the traditional device OEMs with those kind of margins. Huawei, ZTE, Xiaomi and Lenovo are coming, and Apple and Samsung can't stop them.
Written by Jason Perlow, Senior Contributing Writer
Image: ZDNet

This week, Apple posted its Q3 earnings results, with $7.2 billion in profit on $42.4 billion in revenue, or $1.42 a share beating Wall Street estimates of $1.39 on $42.1 billion in revenue.

Impressive, right? Well yes, but iPhone revenue is down 21 percent from a year previous.

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Part of this is due to the introduction of the lower-cost iPhone SE, which is effectively the guts of a much more expensive iPhone 6S in the smaller body of the older iPhone 5.

By all accounts, the iPhone SE was a successful product launch. However, that means lower profit margins even if unit sales/volume was high.

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The cheaper iPhone SE can't be blamed for all of this, though. While the $400 or $500 iPhone SE is still cheaper than the iPhone 6S and iPhone 6S Plus, it still is considerably more expensive than Android phones being made in China serving its domestic market, which can go for half the price of an iPhone SE, or even less.

You see, China is increasingly important to Apple because it is one of the few smartphone markets that is not entirely saturated and has potential for additional growth. It is a nation of 1.37 billion people, which is roughly seven times that of Western Europe (191 million), or over four times that of the United States (324 million).

In China, the iPhone is a highly coveted luxury that most people cannot afford, In fact, the country is rife with look-alike products that run on Android, many of them actually fairly well-engineered, such as the Meizu Pro 6, which looks like an iPhone 6 and a Samsung Galaxy S6 had a tryst and produced a love child.

But Meizu is not the industry leader in China. Far from it. Huawei, ZTE, and Xiaomi -- and now Lenovo, which owns Motorola's mobile brand -- are the four titans controlling that country's smartphone output and the lion's share of their domestic mobile industry.

Or as I like to call these guys, the generals of the Army of the Freakin' Ice Zombies.

And make no mistake about it -- the phones these companies make at the high-end are almost as good as what Samsung or Apple makes from a component perspective and are on par when it comes to manufacturing quality. And they can do it for half the price.

For example ZTE's Axon 7, which launches globally this month, is a lot of smartphone for $399. It sports a QHD display, a Qualcomm Snapdragon 820 SoC, 4GB of RAM, 64GB of storage with microSD, a 20MP camera with dual LED flash, a fingerprint scanner, and 802.11ac Wi-Fi.

ZTE Axon 7 too rich for your blood? OnePlus, a relatively small boutique manufacturer in China, has produced something almost as good for $300, and our resident mobile maven, Matt Miller, is now questioning why he should spend more money than that on an Android handset, ever.

A comparable unlocked GSM Samsung Galaxy S7 costs over $150 more. An international iPhone 6S 64GB unlocked is about $800.

Eighty percent as good for half the price? If I was Apple, I would be extremely concerned about my prospects in China. And if I was Samsung, LG, or HTC I would be thinking about the longevity of their smartphone business in China overall.

This has Samsung so wound up that they are now at litigation loggerheads with Huawei over patent violations.

Yeah. Good luck with that in China, Samsung.

But, here is the thing -- it doesn't end in China. China's domestic market is just the start of Apple's and Samsung's problems, not to mention those of the also-ran like HTC and LG.

Taiwan-based HTC has recently had to undergo severe price cuts for its flagship device presumably due to pressure from its mainland Chinese competitors.

If the idea of a $400 super-premium smartphone is cause for worry for Apple's investors, then what about a $300 one? Or a $200 one?

Sounds crazy? It isn't.

It starts with the low-end handsets in export markets like the United States, Europe, South America, Africa, and India. A few months ago I was singing the praises of Huawei's Honor 5X, which is a sleek-looking Android handset with entry-level specifications. It costs $200.

Nobody who is used to playing with an iPhone 6 or a Samsung Galaxy is going to fawn over the thing. But that's not the point -- first the low end of the market erodes, and then it eats away at the high-end.

The Honor 5X was selling for as low as $120 on Amazon on Prime Day -- I thought that was a shocking deal, until ZTE announced that it was bringing to market an almost identical Qualcomm Snapdragon 6xx-based phone for $99.

$99 for a 2GB RAM, 32GB storage Android smartphone with a fingerprint scanner.


You think Huawei and Lenovo are just going to sit still? And the third largest smartphone company in the world, Xiaomi, hasn't even broken into the US market yet.

Technically there is also a fifth horseman, Oppo -- which according to recent market research by Counterpoint -- has unseated Xiaomi for leading marketshare in China. Their actions should be observed closely.

If these guys can make an entry-level smartphone for $99, you can bet they can make a high-end device for $199, especially if they use SoCs with domestic designs, like the Mediatek processors and the Kirin 955 that is used in the Huawei P9.

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And we haven't even seen what kind of display technology Hon Hai (FoxConn) can produce as a result of their purchase of SHARP yet.

The component and supply chain integration that these Chinese firms can attain by all-domestic sourcing hasn't been fully realized. And yet we are already seeing what they are capable of doing.

Huawei, for example, is already taking lessons learned with their P9 and making a handset, the Honor 8, using similar but somewhat lower-spec components that is almost as good for almost half the price.

The Honor 8 hasn't landed yet in the US -- it's for China's domestic market. But you can bet that we will see something that looks a heck of a lot like the P9 at a $300 price point soon. Very soon.

If it doesn't come from Huawei, ZTE will respond with something similar. Or Lenovo will. Or Xiaomi will when it makes landfall in the US.

The Chinese titans will battle it out, each one-upping each other until there are no margins to be had for the likes of Apple and Samsung.

There will be a $200 premium smartphone. Bet on it. It might not happen for two or three years, but it will definitely happen.

Apple will retain their extremely loyal customer base that will continue to buy their products because of the status it entails. But it won't be able to expand its market, and eventually it will start to shrink. And that's fine, because Apple always ends up moving on to do something else.

Samsung, unfortunately, will be in much worse shape. While you can make a unique value proposition for Apple and iOS and their UX, you can't say so for Samsung, who uses Android.

Yes, the company will always have a big component manufacturing business, but it's unlikely they can stay on top when it comes to worldwide smartphone market share.

The smartphone apocalypse is coming. The four Chinese horsemen are bringing it, and nobody can stop them. I'm looking forward to it, actually.

Is the end nigh for Apple and Samsung's dominance of the world smartphone market? Talk Back and Let Me Know.

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