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[Analyst Article]
Chinese Low-cost Smartphone and Tablet PC Market Boom, and Industrial Change
06.11.2012   |   Stone Wu

China’s RMB 1,00o and under low-cost smartphone and Tablet PC markets are growing beyond expectation, and expected to have a big impact on the overall direction of industrial development. As stated in the Dec. 2011 column, “Chinese Low-cost Smartphone Demand – the Largest Variable in 2012 Mobile Phone Market,” low-cost smartphone and Tablet PC are booming in China, as expected, and thus subtle changes in related parts and set makers in Great China Region are being observed. Related-companies in Korea will also need continuous observations.

Mobile Phone Carriers-leading Low-cost Smartphone Market

Low-cost smartphones are increasing rapidly as understanding of all companies such as Chinese mobile carriers’ ARPU boosting, smartphone subsidy scale, demand of consumers, and active responses of Chinese smartphone and related-parts companies is interlocking.

According to Great China Region’s mobile phone companies, and major set and parts companies such as touch panel, AP, and based band, the size of smartphones in the Chinese market sold by Chinese companies is between 45~50M units in 2011, and expected to be over 140M units in 2012. If foreign smartphone is included such as Samsung Electronics, and Apple, it will be the scale of 200M units/year; China is expected to be the largest smartphone market in the world.

In particular, 3 major mobile service operators in China, China Mobile, China Telecom, and China Unicom, are feeding the fires to dissemination of low-cost smartphone as they are aggressively presenting the lowest-specification of low-cost smartphones to mobile companies, and at the same time, promoting a free smartphone when charging with the certain amount of prepaid call charges and signing a contract on monthly charges.

2012 China Unicom’s RMB 1,000 Low-cost Smartphone Minimum Requirements

  2011 2012
Screen Size  3.5”  3.5”~4.0” 
AP  600MHz  800MHz 
Mobile Connectivity  HSDPA (3.5G)  HSUPA (3.75G) 
Camera  2~3M  3~5M 
ROM  256MB  512MB 

(Source: China Unicom)

2012 China Mobile’s Smartphone Requirements by Price Range

  High-end  Mid / High-end  Mid-end  Mid / Low-end  Low-end 
Retail Price  >CNY 3,500  CNY 2,500 ~3,500  CNY 1,500 ~  2,500  CNY 800~1,500  CNY 800 
Screen Size  >4.3”,
QHD or HD 
>4.0”, QHD  >3.7” WVGA  •RMB 1,000: 4.0”, WVGA
•RMB 800~900: 3.5”, HVGA 
>3.2” 
AP  Dual Core,
>1.2GHz 
Dual Core,
1.2GHz 
1GHz   1GHz  800MHz 
Camera  >12M  8~12M  8M  5M  3M 

(Source: China Mobile)

In general, if you prepay RMB 1,000 right now, you can get free mid/low-cost smartphone from most of the Chinese companies, and for foreign brands, if you prepay RMB 3,000~4000, you can get free HTC or Sony and Samsung Galaxy S2 for RMB 6,960.

For example, Coolpad T60 is free with prepayment of RMB 260 and monthly payment of RMB 26, Hisense T81 is free with prepayment of RMB 630 and monthly payment of RMB 50 and Lenovo A66T is free with prepayment of RMB 990 and monthly payment of RMB 90; dramatically reduced the burden on consumers.

China Mobile’s Major Promotion Smartphone during Labor Day in May

(Source: China Mobile)

In short, low-cost smartphone to Chinese consumers is “usable.” Although is leaves much to be desired in terms of design, performance, and LCD screen size, it has a definite competitive edge in performances compare to the price.


Chinese Low-cost Tablet PC Market, 7” and under $150 is in Trend

Compare to Chinese low-cost smartphone market, which is growing with the strong support (subsidy) of mobile carriers, low-cost Tablet PC is expanding its area in the open market only with the one weapon, “low-cost.” According to panel makers, AP, touch IC, and major set makers, 2012 the total Tablet PC production of Chinese companies is expected to be 40~45M units; it has large industry scale.

As of the end of April 2012, total of 111 models were registerated  www.360buy.com, popular internet shopping mall in China, and of all, 56 models were 7” and 25 models were 8~8.9”. Most of sales prices of Chinese local brands 7” products are formed under RMB 800.

The End of April 2012, Chinese Tablet PC Prices and the Number of Models by Size

(Source: www.360buy.com, Organized by Displaybank)

Looking at the number of models by size, 7” products have the most models because they are portable and easy to make low-cost since the unit cost is low. Currently in Chinese market, the cheapest 7” Tablet PC is HKC M702, and it is being sold at RMB 399 (USD 63.3). Compare to Lenovo LePad A1, which is being sold at RMB 899 (USD 142.6), you can tell sales price of local companies is really cheap.

Above all, most of low-cost products have similar product specifications and also have many numbers of models since almost all of them use Chinese companies’ AP such as Allwinner, Rockchip, and Ingenic; Reference Board concept, which Mediatek and Spereadtrum made use of at Shanzhai Market in China, has expanded to Tablet PC industry. Reference Board, called Gongban (公板) in China, is a development method widely used in China since it allows new products to be on the market with a minumum of development manpower and time.

The Lowest-priced 7” Tablet PC Specification Comparison

Company  HKC  Onda  Ainol  HKC  Onda  Teclast  Onda  Lenovo 
Model Name  M702  VX610W  NOVO7  M701  Vi10  P75a  VI20W  LePad A1 
Price (CNY)  399 399 499 499 529 568 699 899
Price (USD)  63.3 63.3 79.2 79.2 83.9 90.1 110.9 142.6
Display  Display Size  7"  7"  7"  7"  7"  7"  7"  7" 
Display tech  TFT  TFT  TFT  TFT  TFT  TFT  TFT  TFT 
Resolution  800×480  800×480  800×480  800×480  800x480  800x480  800x600  1024x600 
Touch  N/A  2-point
Resistive 
5-point
PROCAP 
N/A  5-point
PROCAP
5-point
PROCAP
5-point
PROCAP
N/A 
OS  Android 2.3  Android 2.3  Android 2.3  Android 2.3  Android 2.3  Android 2.3  Android 2.3  Android 2.3 
IC/Memory  AP  1.5GHz  1.5GHz  1GHz  1.5GHz  1.5GHz  1.5GHz  1.5GHz  1GHz 
AP model        name  AllWinner A10  AllWinner
A10 
Ingenic
JZ4770 
AllWinner
A10 
AllWinner
A13 
AllWinner
A13 
AllWinner
A10 
TI OMAP
3622 
DRAM  512MB  512MB  512MB  512MB  512MB  512MB  512MB  512MB 
Memory  8GB  8GB  8GB  8GB  8GB  8GB  8GB  2GB 
Network  WiFi  WiFi  WiFi  WiFi  WiFi  WiFi  WiFi  WiFi 
Dimension  Weight  770g  330g  520g  374g  330g  340g  383g  400g 
Height    14mm  13.2mm  11.2mm  11.9mm  9.9mm  14mm  11.95mm 
Width  230mm  186mm  176mm  192mm  186mm  204mm  187mm  195mm 
Length  151mm  114mm  110mm  124mm  120mm  122mm  135mm  125mm 

(Source: Each Company, Organized by Displaybank)

Chinese low-cost Tablet PC has some common characteristics to lower the cost of production. It uses PMMA, not glasses, for cover lense, omits cover lense while attaching protective film on the tempered ITO glass sensor, and uses low-end touch control IC that supports 5 points, not 10 points, for touch.

Chinese Low-cost Tablet PC Features

Source: Each Company, Organized by Displaybank


Chinese Own Special Needs Driving the Growth of Low-cost Tablet PC

What makes Chinese consumers to buy low-cost Tablet PC? From what I heard, on my business trip to Beijing, China at the end of April, from the employee who worked at electronic store, a major motivation is to watch “PPS”, “Youku”, “Tudou”, and “Qiyi,” internet video streaming services, and people also buy low-cost Tablet PC as an alternative to a video player, Media Player, since Tablet PC is equipped with “OTG” feature, which can play video files saved on external hard drive.

If you can watch various movies and dramas comfortably on a bed or a sofa with the price under RMB 1,000, it should be a good investment.

Chinese Leading Internet Video Service Providers

Note: Clockwise from top left, PPS, Tudou, Qiyi, Youku

(Source: Each Company, Organized by Displaybank)

Although pirated videos take majority of Tablet PC, because it is based on the specific application, it is difficult to see as a temporary boom.

I encourage you to visit Chinese video streaming sites if time allows.

PPS: http://www.pps.tv
Tudou: http://www.tudou.com
Youku: http://www.youku.com
Qiyi: http://www.iqiyi.com


The Impact on the Industry upon Chinese Low-cost Smartphone and Tablet PC Boom

(1) Smartphone Shipments Ranking Upheaval
Huawei and ZTE are considered to be representatives of Chinese smartphone companies and Lenovo, with strong brand power and distribution network, is emerging as a dark horse although it has small shipments. Both Huawei and ZTE are aiming to ship over 40M units this year, and Lenovo is aiming at 20M units.

There will be a change in worldwide mobile phone, or smartphone sales rank depending on the low-cost smartphone sales of these companies; Huawei and ZTE can enter the top 5.

Important point to note is that parts of Huawei, ZTE, and Lenovo are mainly supplied from companies in Great China Region and in particular, touch panel is divided into Chinese and Taiwanese companies. AP and Baseband chip are primarily supplied by Qualcomm and Intel (Infineon), but MediaTek of Taiwan and Spreadtrum of China are gradually increasing supply.

(2) Breakthrough of Great China Region AP and Touch IC
The companies to primarily benefit from the expansion of Chinese low-cost smartphone and Tablet PC market are China’s AP and touch IC companies.

Currently Allwinner, Rockchip, and Ingenic, Chinese AP companies, and Focal Tech, and Goodix, Chinese touch IC companies, are taking account of 80% of the market share, and as low-cost Tablet PC market continues to expand, these companies will grow together.

Qualcomm and Intel are still leading AP and Baseband chip of low-cost smartphone, but MediaTek and Spreadtrum are slowly increasing market shares with the “low-cost” as a weapon. 

One thing to note is that because all products presented by IC companies in Great China Region are Reference Board type, targeting Total Solution, they provide a list of related parts guaranteed compatibility. Of course the companies included in the list are mainly Great China Region companies. In other words, the more Chinese smartphone or Tablet PC companies adopt Great China Region’s AP and touch IC, the more sales of related parts companies in Great China Region.
When Korean parts companies intend to enter the Chinese market, contact with set makers is important, but IC companies should not be neglected.

(3) Fragmentation of Android OS and Cloud Service
Chinese internet service providers started to build in Cloud service to modified Android OS in cooperation with smartphone companies.

Previously, each of Chinese mobile carriers had different modified Android OS; China Mobile had OPhone OS, China Unicom had WoPhone OS, Lenovo had Le OS, and Hisense had Tapas OS.

Since a company called XiaoMi (MI) released Android OS-based UI, MIUI, for everyone when rooting, Alibaba, an internet B2B commerce company, introduced “Ali Cloud OS 2012” equipped smartphones, W700, W806, and W619, with Tianyu, Baidu, called Google of China, introduced Cloud-equipped H5018 with Changhong, and Huawei introduced a smartphone called U8832 with Qihoo 360, an internet security and Cloud service provider. In addition, Huawei and ZTE are providing its own Cloud service.

Product differentiation can be the reason for the extreme fragmentation of Android OS in China, but on the one hand, generating revenue from software, not hardware, based on differentiated service is affecting more.

(4) Intensified Competition between Chinese and Taiwanese Companies
Until last year, there was a distinct division of roles; Taiwanese touch panel makers mainly supplied global set makers such as Samsung Electronics, Apple, HTC, Motorola, Sony Ericsson, RIM, Acer, and Asus, and Chinese touch panel makers supplied Chinese makers such as Huawei, ZTE, TCL, Lenovo, Tianyu, and Coolpad.

However, they have plunged into extreme oversupply since Apple iPhone5 begins to use In-Cell touch panel starting this year, the performances of global companies, other than Samsung Electronics and Apple, are poor, and CMI and AUO, LCD panel makers, aggressively supply G2-type touch panel to Tablet PC.
To depart from it, Taiwanese touch panel makers (TPK, Wintek, YFO, J Touch, Mutto, SWEC, CPT, Sintek) turn their attention to Chinese low-cost smartphone and Tablet PC market, and have been at a price war with Chinese companies (Laibo, EELY, O-Film, Success, Tianma, BYD) in full-fledge. Taiwanese makers have been focused on promoting G2 and G1F type touch panel to differentiate their products.

The problem is because Chinese makers have completed large scale capacity expansion last year, Great China Region touch panel makers will have zero-sum game in China.

(5) Will Spring Come Again to IDH/ODM Companies with Low-cost Mobile Phone and Table PC Boom?
Great China Region mobile phone IDH (Independent Design House, a pure development company with no production facility) and ODM companies had enjoyed a boom during the feature-phone era, before smartphone came into wide use.
 
Smartphone era opened, and IDH and ODM companies, which were optimized for H/W-oriented development and production, saw sharp decline when S/W-oriented completeness became so important. Now, with the increasing demand for low-cost smartphone, Chinese brand companies plan to increase the outsourcing of low-cost smartphone and Chinese ODM companies, WingTec, BYD, G Five, and Longcheer, and Taiwanese FIH (Foxconn International Holdings), Arima Communications, and Compal Communications are actively coping.

Based upon past experience, it is general for the parts purchase right of outsourced low-cost products to be transferred to ODM companies, and smartphone ODM companies will be able to exercise certain influence in the parts market.


Conclusion

So far, there is no doubt about the growth of Chinese low-cost smartphone and Tablet PC, but there are two potential risks:

First, the boom of these low-cost products is limited to China so far, and the scale exported to Southeast Asia, Africa, Russia, and Brazil, main export regions of China Shanzhai phone in the past, is known to be insignificant. If Chinese low-cost smartphone and Tablet PC fail to bring noticeable results in these regions, the growth rate can be subsided in 1~2 years.

Second is Chinese consumers’ brand loyalty. Before and after 2004, Chinese mobile phone companies have recorded over 50% market share in the domestic market. Then, Bird, TCL, Amoi, Panda, and CECT were local mobile phone companies, predominating Chinese market, and all of them, except TCL, filed bankruptcy. The heyday of Chinese companies was only 3 years. Since 2006, the total market share of Chinese companies has never passes 50%, but why?

The problem is Chinese mobile phone quality was poor and consumers picked Nokia, Motorola, Samsung Electronics, and LG Electronics, global companies, products when re-purchasing after 1~2 years. Of course it was crucial that global companies committed to lower the price in the mean time and even lower-priced Shanzhai phone appeared, but in situation where income increase significantly, and consumers see mobile phone as a tool indicating status, Chinese mobile phone, which affordability is the merit, will be forced to lose its footing. Even now, Chinese consumers’ brand loyalty to Chinese mobile phone is very low and if it is not connected to re-purchasing, small-medium size late comers will be led to downfall again.

Since “low-cost” is the ongoing trend, I hope related companies can prepare by taking a long view at “low-cost” trend.


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