One could argue Samsung has suffered a terrible stroke of bad luck last week due to the recall of its latest innovative smartphone and their long-time rival, Apple, releasing the latest iteration in the iPhone series, the iPhone 7. However, it is not simply the timing of a defect that presents a challenge to the global giant – domestic smartphone companies are increasing the competition in the largest smartphone market in the world, China.
As a result of a complication and defect within the lithium ion battery of Samsung’s latest phone, the Galaxy note 7, the company has been forced to recall around 2.5 million devices. Due to the scale, distribution of owners and the logistics of the recall, this will not be a quick turnover and subsequently, with the time taken to process returns and then manufacture and ship replacement phones at Samsung’s expense, the company will suffer a loss in sales and through replacement expenditure, totalling around £750m. While identifying the problem early reduced the company’s exposure to risk from further defects, the damage to the brand’s image is currently incalculable.
The brand also suffered when the US aviation authority issued instructions to passengers regarding their phones. The concern over the safety of the device has additionally caused Australian airlines, including Qantas and Virgin Australia, to ban customers from utilising the phones on flights. The controversy wiped over $10bn from Samsung Electronics’ market capitalisation. Consequently, with the latest development resulting in the company seeing a 3.9% drop on Friday.
Ultimately, the recall has cost Samsung the advantage it had gained against Apple. Furthermore, it has had the indirect consequence of drawing attention away from Apple’ tax battle in Europe. However, Samsung must also be concerned about the threat from its Chinese rivals who will use the estimated two-week recall time to gain market share. Within that time, consumers are likely to look to Apple and the Chinese producers for their latest upgrade and smartphone, dealing a blow to Samsung’s sales. Even the battery manufacturer Samsung SDI dropped to a new ten-week low on September 4th as a result of investors fleeing a predicted cost deployment of the new batteries on the firm.
Apple Announces The iPhone 7
Across the aisle, Apple announced that the iPhone 7, “the world’s most advanced smartphone – the best iPhone we have ever created,” is to be released on September 16. Yet, even with this announcement set to create further profits for the global giant, the actual price tag attached to the phone could hurt its sales in the largest smartphone market, China.
The prices of Apple’s devices have risen to meet the loss resulting from the depreciation of the Chinese currency in the past year, adding 5% to the price of the devices. Added to this is the fact that certain features of the iPhone 7 appear to be unfriendly to users, has led certain observers, like the IDC, to predict sales will be hurt.
For instance, the lack of an audio jack for headphones requires new wireless earphones, the airpods, which not only carry a hefty price tag but they also cannot be used while the phone is charging. Consequently, the IDC has commented that this feature is likely to deter Chinese users. This is exacerbated by the battery life of the earbuds, five hours, thus being another deterrence for those users who travel long distances to work or in general.
Furthermore, Bloomberg commented that the new phone is not the “smash hit” that Apple had hoped for since it offers little that “resonates with Chinese consumers,” specifically that there are no affordable models such as the previous SE or 5C models. As a result of this outlook, despite Apple’s shares rising briefly on the 7th after the announcement, the shares began to see a decline the next day.
Due to the high price tag, some Chinese consumers will instead opt for Chinese brands which bring cutting edge hardware for a lower price. By offering equally powerful devices at lower costs, Chinese companies are undercutting and eroding both Apple and Samsung’s presence in China. As a result of this less than optimal reception, analysts have recommended that consumers wait another year for Apple’s rumoured 10th-anniversary edition of the iPhone, since the iPhone 7 does not offer anything more than “outdated hardware upgrades,” and that Apple may even be copying Chinese producers.
For example, many Chinese phones already have features such as the dual-camera (Huawei’s P9, launched in April 2016, and Xiaomi’s Redmi Pro). Simply put, Apple is not making new additions to its product line regarding design or appearance and is instead conforming to the Chinese phone market, which already have lookalikes for much less money.
The consumers and investors are less interested in Apple’s products than they were some years ago and once can see this from Apple’s release history when cross-referenced with the share index. The iPhone 6 and 6 Plus were announced in September 2014 and Apple saw a large rise in share value to the point where, in April 2015, the company hit an all-time high. The company then saw a lull in value as it approached the announcement of the new phone, the 6s and 6s Plus which again managed to increase the value of the company but not to the same extent as 2014, showing a decline in interest from investors.
This is further obvious in the earnings reports from Q3 of 2016, which show a decline in demand for the iPhone. As a result, phone sales, which account for 57% of the company’s profit, are not to be overlooked. The Chinese market has brought Apple a windfall for many years, yet the previous two quarters of 2016 have shown a different story, with the company falling to fifth place behind four Chinese brands.
Trouble In Paradise
The challenges faced by Samsung and Apple from domestic Chinese firms such as HTC are exacerbated by the increased saturation of the smartphone market generated by the smaller firms. Moreover, the smaller firms are gaining an increased share of products shipping in China as well as benefitting from increasing subsidies from domestic telecom operators. Furthermore, when one considers that smartphone penetration is reaching its peak, the battle shifts from selling phones to new users towards convincing existing users to upgrade.
In light of this, the lack of new features from both Samsung and Apple that are distinct and unique enough to stand out will erode some of the love for the platforms. Contributing further to the market share loss is the cost of the devices, as aforementioned. Despite the availability of similarly powerful phones at much lower prices, both Apple and Samsung have increased the prices of their phones. While the increases in market share from domestic companies may be incremental and thus both giants can still be considered immune from price pressures, there now exists real consumer choice, and that will cause the pressure to rise over the next few quarters particularly as Chinese domestic brands have succeeded in achieving year on year growth, with sales growing exponentially in 2015.
Such Chinese brands are also turning their attention to Europe in the search for better growth figures and increased sales. Huawei, for example, had its first London launch in 2013, and this was followed in the subsequent three years by the company overtaking Sony and Microsoft to become the world’s third-largest smartphone maker.
This is bolstered by Huawei’s 20% market share in European countries like Spain and Italy. Simply put, these companies are successful in Europe because they offer high-end technology at mid-tier pricing, particularly in markets that are less influenced by brand names such as Germany. In these markets, price plays a bigger role and currently, the Chinese companies are playing the better game by accepting lower profit margins and holding out for bigger market share.
Apple And Samsung: Room For Growth?
Despite the iPhone 7’s less than optimal reception, Apple can still make a large impact in the market with the next iteration, as Apple is expected to make a 2017 iPhone for the 10th anniversary of its product. How can Apple, and Samsung for that matter, ensure their next phone is a winner?
The Chinese brands have turned their attention to Europe, and while they have seen some success, they cannot deploy capital to the same extent as Apple and Samsung can nor do they have excellent brand awareness.
Both Apple and Samsung can use this advantage by seeking and creating deals with networks and retailers to overshadow Chinese brands which may not sell well if they are not known. This includes playing upon the brand loyalty of consumers towards Apple and Samsung and special deals ranging from upgrade programs to exclusive carrier deals. Both giants can eclipse the success of Chinese brands in Europe by using their reputation in combination with new, innovative strategies.
One method could be creating features for the phones that are specific to Chinese customers. For example, Apple could integrate Uber and their Chinese rival, Didi Chuxing, allowing them to cater to the Chinese market ahead of other domestic brands. What’s more, both Apple and Samsung have the capital and reputation to put these deals in motion.
A common theme in the criticisms of the new iPhone is the lack of visual advancement compared to its predecessor, and this can be argued to be a result of the fact that customers want to ensure that their phone is easily recognisable and distinct from previous versions. If they are going to pay significant amounts for a phone they want it to be known instantly, specifically Chinese consumers, who enjoy having products that give them “face,” thus having a phone that is unmistakable can be a major selling point.
From this feedback, both Apple and Samsung can both innovate their design and compete at a higher level than their Chinese rivals, as not only do both companies have the room to experiment with design, but they also have the ability to deploy large research assets to find out what features, visuals and interfaces consumers want.
Developers And Applications
It is not simply the visuals of the phone that need innovation, but there is also a need for additionally working with developers to open up the phone’s software to better apps and flexibility will improve end-user quality of life by having a range of apps that integrate with each other to create unrivalled user experiences.
For example, Apple has been working more closely with developers to open its software up for integration and improved performance with the personal assistant Siri, enabling developers to make use of the platform for better app awareness and user engagement. Fundamentally, this is where Apple possesses a slight advantage over Samsung since Samsung utilises the Android software which is owned by Google, which in turn is limited by patents and licences whereas Apple has complete freedom over its iOS platform. Ultimately, opening up the software to better development of apps for the user increases the versatility of the phone and thus its attractiveness.
A further point of contention is music. Both Samsung and Apple possess applications that can play music on the phone but this already existing service can be used to their advantage in China.
If Apple is successful in its acquisition of Tidal, it will close the user gap between iTunes and Spotify, as well as score Apple exclusive artists for its platform. This move will help Apple increase the number of users listening to its music services and thus, with exclusive music apps on the iPhone, increase phone sales, particularly in China.
The Next Target
Apple and Samsung could also consider moving into the mobile gaming market, given that it is estimated at $35bn. With the ability to create more powerful phones than their Chinese rivals, Apple and Samsung can allow developers to build better games with more accurate visuals, enhanced graphics and larger data use.
Furthermore, with more companies seeking to enter the mobile gaming market, most recently Nintendo, Apple and Samsung can seek deals to launch games exclusive on the phones and strike out any competition in the Chinese and global markets by attracting gamers to their new phones.
For example, Nintendo saw an 18% increase in share value last Thursday as investors saw the potential of releasing one of gaming’s most iconic characters, Mario, on the iPhone. Apple took advantage of its reputation, market share and consumer base to offer Nintendo the opportunity to launch a mobile game and facilitates their entry into a lucrative market and it is collaborations such as these that will eclipse the Chinese firms.
Ultimately, the iPhone 7 did not have the investment impact Apple wanted, and Samsung has been hampered by the recall of its latest phone. Both of these events are adding to the pressure created by home-grown Chinese smartphone brands. Both Apple and Samsung must evolve their strategies and take increasing risks with design and versatility if they are to penetrate further into the Chinese market. With sales of first-time phones slowing down, and now users looking at upgrades, if similar technology can be bought for a lower price, Chinese firms will begin to erode the bottom line of both Apple and Samsung.