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Smartphone makers facing stiffer competition in changing Chinese market

Samsung's popularity is fading fast in China.

BEIJING/SHANGHAI/GUANGZHOU, China -- High penetration and slowing demand for upgrades are among the structural changes reshaping China's massive smartphone market and fueling competition among the country's many handset makers.

Struggling Samsung

A China Mobile store in Beijing displays phones from such Chinese brands as vivo and Oppo, crowding out Samsung Electronics models.

     "Samsung? You can get one for cheap, but I don't recommend it," a sales staffer says quietly. "You can't brag about it."

     China is the world's largest smartphone market, accounting for a third of global sales and shipments totaling 420 million units in 2014. But it shrank for the first time in six years in the January-March quarter, with shipments falling 4.3% to 98.8 million handsets, according to U.S. research firm IDC. Samsung has suffered the most from this screeching halt in what had been uninterrupted growth. Its share of the Chinese market stood at 9.7% in January-March -- half what it was a year earlier.

     The South Korean company sharply ramped up production of the Galaxy line and other flagship models at the start of the year and sent more phones to dealers in hopes of recovering lost share. But this aggressive tactic has backfired, causing rapid inventory buildup amid weak sales and possibly forcing Samsung's suppliers, who had placed priority on filling the company's orders, to scale back production.     

     Powerhouse Apple has regained its standing thanks to large-screen phones, while Xiaomi and other Chinese rivals have lured away Samsung customers with more-affordable handsets. But there are also structural factors at play that cannot be chalked up to just product differences.

Changing times

"The smartphone 'upgrade boom' is over," said a worried veteran sales representative at Buynow, a prominent electronics store chain in Beijing, who has handled the smartphone sales floor for seven years. "The market's growth will probably slow down more from this year on."

     Smartphones started to fully take off in China in 2009, the staffer said. Consumers who had been using conventional phones switched to smartphones en masse following the entrance of Samsung and Apple into the market. After using their first devices for two or three years, they started to change phones in 2012, looking for improved functionality or design -- the "upgrade boom." This phase has started to draw to a close, and consumers' mindsets are changing significantly as well, the staffer observed.

     One company employee in Shanghai says he plans to stick with the iPhone 5S he bought in March 2014 for the time being. He uses it frequently to chat with friends or play games.

     "My current smartphone's capabilities are good enough," he said. "I won't replace it as long as I don't lose or break it."

     Consumer smartphone penetration has reportedly reached 90% in China, where the devices are even found in remote inland areas. Smartphone performance has also improved, enabling devices to run a wide array of apps. These developments will inevitably extend the time between upgrades.

     "Rapid growth like we've seen so far isn't likely as long as there aren't any really innovative new smartphones," said the Buynow sales representative. IDC also expects growth to be flat in 2015.

     Lenovo Group was another company to lose market share in January-March. At an earnings announcement in Hong Kong on Friday, Chairman and Chief Executive Officer Yang Yuanqing explained that the company intends to move away from lower-priced models, focusing on profits rather than volume.

     Rumors are circulating among parts makers that even manufacturers that have fared better, such as Xiaomi, are starting to face dealer inventory gluts. The structural changes underway seem to be reverberating throughout the industry.

Cutthroat competition

A number of new smartphone manufacturers have cropped up in China, among them Gionee Communication Equipment, Smartisan Technology and Meizu Telecom Equipment, in the wake of wildly popular Xiaomi. Flagship models from vivo maker BBK Electronics are priced at around 2,000 yuan ($322), about the same as Xiaomi's handsets, and offer similar performance. BBK had mainly offered devices for language students until two and a half years ago, when it switched to smartphones.

     There are reportedly as many as 60 of these new industry players in China. Smartphones can be made by simply putting parts together, much like computers. Since almost anyone can make them, competition is fierce and brands go stale quickly.

     Early on, "the most popular company was Taiwan's HTC," said the Buynow sales staffer. "Then attention shifted to Samsung, but that didn't last long."

     Some of the smartphone makers trying to survive in these tough conditions are cultivating other markets, such as India, Eastern Europe and South America. Many are looking to break into new businesses.

     Wearable devices are one of the more prominent examples. Lenovo is working to develop smart glasses and smartwatches, taking advantage of technology from U.S. acquisition Motorola Mobility. Xiaomi has expanded into wearable devices as well as smart televisions and tablet computers.

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