China smartphones: Xiaomi the money

January 17, 2014 Leave a comment

January 16, 2014 11:00 am

China smartphones: Xiaomi the money

iPhone’s moment in world’s biggest market comes as local competition is gearing up

Xi Guohua will not have to join any queues to get his iPhone. The China Mobilechairman was given one by Apple chief Tim Cook. Friday sees the launch of theiPhone on the Chinese network, with its mind-boggling 750m subscriber base. But the iPhone’s moment in the world’s biggest market comes just as the local competition is gearing up. If, as Apple’s (and Samsung’s) margins suggest, even high-end smartphones are becoming less profitable, what are the likes of Huawei, Lenovo and Xiaomi thinking?Combined, China’s top 10 makers expect to shift more than 400m phones this year, a 50 per cent increase on 2013. About 440m smartphones will be sold in China in 2014, according to Credit Suisse – a 25 per cent jump. That includes Apple, Samsung and other top tier makers, implying the home brands must also be aiming for other emerging markets, where sales are expected to rise a third, to 470m. Chinese makers often have high-end ambitions, but their bread and butter is in the low- and mid-range phones that rule emerging markets.

Plentiful demand is one thing, making money is another. Apple and Samsung profit from using their scale and brands to cut costs and demand top dollar. Low-end phones cost far less to make. The cost of producing a so-so brand 4.7’’ screen phone could be as low as $94, Credit Suisse reckons, compared with $266 for Samsung’s Galaxy S4. But that cheap phone sells for $122, versus $554 for Samsung’s smash hit. That’s a 10x difference in gross profit. Sure, commoditisation will squeeze Samsung and Apple, but it will not entirely kill their pricing power. If consumers happily pay premiums for cigarettes and branded water, it is not hard to see value in a strong phone brand.

Chinese makers could try taking on Samsung and Apple by building rival brands – butask HTC about the risks in that. The jump in this year’s shipments implies they are instead seeking scale in order to squeeze suppliers and grind out profits. It is the better plan, but it will not make much money, either.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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