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Woes deepen for China's smaller smartphone makers

Gionee and LeEco are among those struggling as demand slows

TAIPEI The recent struggles of Gionee Communication Equipment and LeEco are raising doubts about whether second-tier Chinese smartphone makers can survive slowing domestic demand for handsets.

According to local media reports, a Chinese court has frozen Gionee Chairman and CEO Liu Lirong's 41.4% stake in the smartphone maker for a period of two years. The company is reportedly having trouble paying its suppliers.

Gionee is a smaller rival to Huawei Technologies, Vivo, Oppo and Xiaomi.

While Gionee did not confirm whether Liu's assets had been frozen, it said in a statement that the case is still in the judicial process and that the company will resolve the issue as soon as possible.

An executive at a major Taiwanese supplier to Gionee told the Nikkei Asian Review that the company is experiencing some financial troubles but did not provide further details.

Gionee's woes highlight the problems facing midsize Chinese smartphone makers attempting to stay afloat as demand weakens in an already highly competitive market.

The company is the second Chinese smartphone maker hit by financial problems over the past year.

LeEco's smartphone is on display during a press event in San Francisco in October 2016.   © Reuters

Tech group LeEco, which offers smartphones and online streaming services, started falling behind in paying suppliers amid rapid expansion at the end of 2016.

Shares of its Shenzhen-listed unit, Leshi Internet Information & Technology Corp. Beijing, resumed trading on Jan. 24 after being suspended last April. However the share price fell 10%, the daily limit, on every trading day through Jan. 30.

In two transactions in January, a LeEco affiliate disposed of its 28.8% stake in Coolpad Group, which back in 2013 had been one of China's largest smartphone makers.

Coolpad suspended trading of its shares in Hong Kong in March 2017 and still has not been able to post its audited 2016 results. According to the unaudited results Coolpad provided in an exchange filing in May, the company lost 4.2 billion Hong Kong dollars ($537 million) in 2016.

Taiwanese suppliers are also feeling the impact, though their operations have not been significantly impacted so far.

The executive at Gionee's Taiwan supplier estimates that MediaTek, a key mobile chip provider, is likely to lose some $60 million worth of orders from Gionee in 2018 in the worst-case scenario of the Chinese smartphone maker going out of business. MediaTek's spokesperson said his company is not affected by the current financial woes of Gionee.

In 2016 and 2017, Taiwanese contract electronics maker Compal Electronics recognized a total of 4.28 billion New Taiwan dollars ($145 million) in bad debt charges related to LeEco.

Meanwhile, smartphone assembler FIH Mobile, the Hong Kong-listed subsidiary of Hon Hai Precision Industry, has also been hit by the downtrend in the Chinese smartphone market.

FIH counts Huawei and Xiaomi as its major customers. It has assembled Gionee handsets in India in the past, but it is unclear whether Gionee is still a customer.

The company expects to report at least $400 million in losses for all of 2017. Of this, $162.5 million is from an investment in Indian e-commerce startup Snapdeal, while other losses were attributed to a lower gross margin, according to FIH.

FALLING MARGINS FIH said in its interim report for 2017 that its gross margin fell from 5.8% in the first six months of 2016 to 2.6% in the first half of last year.

The company attributed the deterioration to a fall in smartphone casing sales and a concurrent rise in its assembly business, which has lower margins. This may indicate that the company is taking more orders from smaller companies, which often offer poorer profits than orders from market leaders.

The fortunes of Chinese smartphone makers can be volatile.

For all of 2014, the top three Chinese smartphone makers by shipments were Huawei, Lenovo Group and Xiaomi, according to IC Insights, while for all of 2016, the top three had shifted to Huawei, Oppo and Vivo. For the third quarter of 2017, the top three were Huawei, Oppo and Xiaomi, according to Gartner.

The global smartphone market will slow to 3.3% compound annual growth from 2016 to 2021, compared to 10.4% in 2015, according to research company IDC.

IDC's estimate also shows that shipments of all global smartphone makers outside the top five are declining, down more than 13% on the year in the third quarter of 2017.

Gionee is the world's No. 11 smartphone maker and the seventh-biggest Chinese handset brand by production volume, producing some 26.4 million units in 2017, according to Taipei-based research company TrendForce.

"We believe now it's still too early to call a potential bankruptcy for Gionee. But for the long term, we are concerned that tier-two smartphone vendors in China like Gionee cannot survive," said Andrew Lu, a veteran tech market watcher who publishes notes on Singapore-based research platform Smartkarma.

Lu added that these smaller Chinese brands might not be able to invest heavily in costly advanced features such as face recognition and artificial intelligence, and that it will become harder for them to compete in a market that is no longer booming.

Roger Sheng, an analyst at Gartner, echoed Lu's comments and said that a lot of Chinese smartphone makers had a bad year in 2017, with mobile divisions of China's TCL, Lenovo and Meizu all losing money.

Just under a year ago, a senior executive at Huawei warned that some handset makers in China could soon face a serious survival challenge in the saturated market.

"You will probably see fewer and fewer smartphone brands in the market after this year," Jim Xu, president of sales and marketing for Huawei's consumer business group, told reporters in early 2017. "Looking at the market competition out there, I think it will be very difficult for some smaller handset makers."

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