Smartphone Manufacturing in China

“A smartphone is a mobile phone with an advanced mobile operating system which combines features of a personal computer operating system with other features useful for mobile or handheld use {1}”.

The main activities of manufacturers involved in smartphone industry is to manufacture smartphones that are capable to run operating software such as iOS, android, or windows, and to manufacture phone accessories. Major companies in Chinese smartphone industry are Huawei, Apple, Samsung, Xiaomi and Lenovo. In China, most of the smartphone manufacturing facilities are located in Guangdong province, Beijing, Tianjin and Shanghai.

smartphone manufacturing in ChinaIn 2012, China becomes the largest market for smartphone in the world surpassing US {2). Growth of smartphone industry in China can be directly attributed to its population as large population that means large customer base. Further, increase in disposable income and improvement in China’s telecommunication network is also enticing people to buy smartphones.

Currently, China is the largest manufacturer and exporter of smartphones. In 2015, revenue from smartphone manufacturing industry was around $98.2 billion and it is expected to grow at annually at 58.1% over the next five years. Total smartphone production in 2015 was approximately 616.6 million units about 51.9% higher than 2014. Export is the major contributor to the industry revenue and accounts for about 74.8% of total revenue. In 2015, smartphone export amounted to $73.5 billion, while import accounted for $3.2 billion. Majority of the exports were to countries such as Hong Kong, United States, South Korea and Japan, while imports were from South Korea, Taiwan, Hong Kong and Japan {3}.

smartphone in chinaPic1With strong commitment by Chinese government to improve network infrastructure and to relax policies, the outlook of the smartphone industry looks very good in China. In 2005, Chinese government abolished the licensing requirement for smartphone manufacturers and introduced a new registration process. The registration process eased the rules and regulation needs to be fulfilled to start a smartphone manufacturing business.

Domestic demand in China is further expected to grow at the rate of 57% because of population growth, replacement of feature phone with smartphones, expected increase in demand in western and central China, and with expansion of 3G/4G network. Also, growth of the smartphone industry is heavily dependent on the development of distribution channel. Most smartphone manufacturer build their network in China by building their own stores or agents, by partnering with agents or electronic retail chains, by partnering with telecommunication operators, or through online stores. Based on the growth prospect the smartphone industry can be classified in the growth stage of its life cycle.

smartphone in chinaHigh growth and profitability attracts lots of new manufactures to the smartphone industry and making the industry very competitive. In 2015, number of smartphone manufacturers in China were about 449, 4.9% higher than last year. High competition has resulted in merger and acquisition (for example Lenovo & Motorola) to increase the market share and fall in overall profit margin. Smartphone prices is one of the most important factor in the customer’s buying decision and Chinese manufactures are able to compete with international brands on price. and these manufacturers enjoy almost 25% market. By 2015, mid and low priced phones are expected to have 35% market share, whereas smartphones costing less than 1,500 yuan is expected to be more than 50% {4}.

Smartphone industry in China is capital intensive that requires heavy investment in R&D, equipment, distribution channel development, marketing and promotion. Technology in smartphone industry is changing very rapidly and manufactures have to constantly evolve and adapt to new technology to remain competitive. The revenue of smartphone manufactures in China is volatile because it is heavily dependent on exports. Global recession or countries export-import policies can directly affect the revenues.

The China Ministry of Information Industry (MII) is the main regulatory body within China that is responsible for all rules and regulation regarding smartphone manufacturing. The overall rules to register as a smartphone manufacture in China are tough but have been consistent for last 10 years. Based on high competition level, high capital requirement, advance technology and high regulation we can say that the barriers to entry to smartphone industry in China are high. For a manufacturer to be successful in smartphone industry it has to focus on brand development, brand promotion, constant innovation, quality control, and cost control.

Mohammad Imran
Tulane MBA Candidate, 2016