Caixin
Apr 10, 2018 07:45 PM
TECH TALK

Gionee’s Sad Song: China’s Smartphone Canary in a Coal Mine?

I’ve witnessed quite a few boom-bust cycles in China’s tech sector over the years, with flavors of the day like microblogging, group buying and most recently shared bikes all spending brief time in the sun before crashing and burning. But the one that’s long overdue is in China’s overcrowded smartphone sector, where big names like Huawei and Xiaomi compete alongside a large group of second-tier, more niche players like OnePlus, Smartisan and Coolpad.

After a waiting game that’s lasted at least a couple of years, we’re finally seeing some of the first signs of major cracks in the system with recent woes at Gionee, a company that’s second-tier but also decidedly at the top of that pack. My sense of a looming shakeout is also borne out in the broader market numbers, with the latest figures showing a big drop in Chinese smartphone sales during this year’s first quarter.

So, what’s going on here, and is the shakeout for real this time? This latest China tech-tale is rooted in many of the same conditions that have fueled previous boom-bust cycles, which are all too common in this young country’s high-tech landscape. That because high-tech entrepreneurs here don’t seem to care too much about experience, and tend to flock like sheep to the latest hot area of the moment. Most of these cycles ultimately end with lots of carnage, including unpaid bills, stiffed customers and venture capitalists licking their wounds from millions of dollars in lost investment.

This latest boom-bust cycle has the potential to be more spectacular than past ones because it involves hardware rather than just websites or services. That means there’s a lot more money involved, most of it provided by investors who stand to lose billions of dollars. Then there are the thousands of employees at massive factories that crank out these cheap smartphones often selling for $100 or less. Even ordinary consumers stand to lose when they find themselves with broken models and no place to fix them because the brands have gone out of business.

We’ll begin with the latest big-picture numbers, which come to us courtesy of the government-backed China Academy of Information and Communications Technology and show that domestic smartphone sales plunged 26% in the first quarter of this year to 87.4 million units. The report says 206 models were launched during the three-month period, which shows you just how crowded the China market is.

That means that even if a company maintained its market share in the quarter, no easy feat, its sales still would have plunged 26% for the period. That’s hardly a positive thing for most companies that are already believed to be losing money due to stiff competition. Gionee is quickly becoming a poster child for what may be happening in the broader industry, though my contacts were divided on whether this is a company-specific story or representative of the broader industry.

Trouble Signs

Gionee first popped into the headlines last month when it confirmed it had laid off half of the staff at one of its massive factories in the south China manufacturing hub of Dongguan. Earlier this week rumors emerged that the company was having trouble paying some of its suppliers and advertising partners. A top executive admitted the company was having some problems, and asked for time to work its way through the current situation.

Gionee is a private company and doesn’t give out any financial data, but its latest sales trends don’t look too encouraging. The company was China’s sixth best-selling brand in last year’s fourth quarter, with 4.8% of the market, according to IDC. Its ranking was unchanged from a year earlier, though its actual market share was down nearly two percentage points from 6.6% at the end of 2016. When we consider China’s smartphone market also contracted 16% in last year’s fourth quarter, that translates to a sizable overall drop in sales for Gionee, which does 90% of its business in its home market.

One of my contacts opined that Gionee may be a company-specific case, since some of the reports indicated one of its big problems was overpaying for celebrity endorsements – something the company has denied. But in my view this is simply market forces at work. In today’s smartphone world, many models look strikingly similar because they’re all basically using variations of the same hardware running the free, open-source Android operating system (OS).

That kind of low barrier-to-entry is what fueled this latest boom to begin with, and is now finally starting to foment a shakeout as models from a flood of no-name brands have trouble differentiating themselves. In such an environment, customer loyalty is almost zero at the low end, and the only loyalty anyone feels is to whoever offers them the lowest price.

The only other major case of smartphone woes so far comes from Hong Kong-listed Coolpad, which was once similarly positioned to Gionee but later declined and whose latest numbers look quite alarming. The company has been in a state of crisis for most of the last year, and only recently released results showing its revenue slid nearly 50% in 2016 as it posted a massive loss of more than $500 million. The company hasn’t published any figures for last year yet, but I expect the situation only deteriorated.

One of my contacts who closely follows the industry concurred that aside from Gionee, Coolpad is probably the most vulnerable brand in the coming shakeout. He also astutely pointed out that another brand facing difficulty in smartphones is Lenovo, though that company at least has its huge, profitable PC business as a fallback. He added he expects the first half of this year to be weak in general for China, which is supported by the first-quarter numbers. If that weakness does indeed persist, we could finally see a major casualty or two later this year in a shakeout that’s long overdue.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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