Can Chinese Smartphone Vendors Make A Dent In The U.S. Market?

The top Chinese smartphone vendors are looking to make deeper inroads into the U.S. market as early as next year, with Bloomberg reporting that Huawei and Xiaomi are in talks with U.S. wireless carriers, including AT&T and Verizon about selling their flagship smartphones.  While these companies already sell some of their devices via e-commerce platforms, striking relationships with wireless carriers is crucial to scaling up, considering their vast retail footprints, marketing muscle and device financing schemes. On the face of it, the entry of these Chinese players – which are increasingly focused on high-end devices and affordable price points – might prove a threat to incumbents such as Apple, which currently controls about 30% of the U.S. market, per Strategy Analytics.

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Opportunity For Chinese Handset Vendors

Although the U.S. is not the largest smartphone market by volume, it is one of the most lucrative markets from a revenue and margin perspective. For instance, ASPs of smartphones in North America in 2017 are expected to stand at $567, compared to just about $215 in Asia Pacific. Moreover, the U.S. wireless market has undergone some changes in recent years. For one, carriers have shifted away from plans that subsidized handset costs (by baking in the cost of the high-end device with monthly service billings) to contract-free plans where customers can bring their own device or buy a phone of their choice with a financing plan from their carriers. This decoupling of plans and phones could allow lower-cost Chinese players to target customers who want to save on device costs. For instance, flagship handsets from the likes of Samsung and Apple, which dominate the U.S. market, come in at levels of close to $1000 (Apple iPhone X and Samsung Note 8), translating into a monthly installment plan fee of about $42 for a 24 month period. Chinese phones, on the other hand, can cost half as much. Separately, Customer wireless bills in the U.S. are trending lower, with the average customer’s wireless bill in the U.S down by 9% year-over-year during November. This is putting pressure on the promotions that carriers offer on devices. There is a possibility that carriers could embrace Chinese devices as a means to provide customers with more compelling offerings while controlling their promotional costs.

There Will Be Multiple Challenges

Chinese players have been able to win market share from the likes of Apple in China, driven by their lower pricing and the fact that Chinese customers spend over 60% of their smartphone time on apps such as WeChat and Baidu, which are platform-agnostic, undermining Apple’s ecosystem effect. For instance, in Q3 2017, Apple held just about 8% of the Chinese smartphone market, compared with just over 33% for Huawei and Xiaomi combined, per a report from IDC. However, Apple’s ecosystem lock-in is likely to be much stronger in the U.S., where all its digital services are available and widely used. Separately, Chinese vendors could also have an image problem in the United States.  Brands such as Huawei are already banned from the telecom infrastructure business in the U.S. amid security-related concerns, and it’s possible that this could hamper the image of their consumer devices such as smartphones as well. Moreover, despite their increasingly global ambitions, these players have comparatively weak intellectual property. While Chinese players like Xiaomi have been growing their patent portfolios, many of these patents are restricted to the Chinese market, where IP laws are not as strong. This could put these companies in a somewhat vulnerable position as they try to ramp up their presence in the U.S. market.

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