Smartphone Sales in China Fall -- How Worried Should Apple, Samsung Be?

NEW YORK (TheStreet) -- As it becomes more sophisticated and brand conscious, the Chinese market has become a huge money-maker for Apple (AAPL). That's why a recent report from research firm IDC warning of a "saturated" smartphone market in China raised some alarm bells for Apple and other big handset makers such as Samsung (SSNLF).

According to IDC's Mobile Phone Tracker data, the Chinese smartphone market contracted by 4% this past quarter from the same period last year, the first time sales had fallen on a year-over-year basis in six years. Apple recently overtook domestic maker Xiaomi to become the largest smartphone vendor in China, where "iPhones are seen as a premium and luxury product linked to a high status symbol in China," said Tay Xiaohan, senior market analyst at IDC and co-author of the report.

Another study by Germany-based GfK Research offered a different take from IDC, however. "The weakness in China was caused by a significant slowdown in 3G demand, which was not offset by 4G growth," said Kevin Walsh, director of trends and forecasting at GfK. As an example, China mobile, the world's largest mobile network, released disappointing profits due to high infrastructure-related costs associated to 4G network roll out.

4G growth is important because it will enable smartphone consumers to use additional services, such as streaming video, more effectively, according to Dimitrious Xydias, research analyst with GfK. "Telecom operators around the world have made significant investments in 4G network infrastructure," he said. "They will have to recoup (these costs) and, therefore, promote 4G-enabled smartphones as more data usage will drive up (their) revenues."

The contrasting takes on the reasons for slowdown in the Chinese markets are significant because they point to different outcomes later in the year. While the IDC Mobile Phone Tracker data indicates that the Chinese market will have "flat" growth rates for the rest of this year, the GfK research report predicts "incremental demand" in China in the second half of 2015 due to a ramp-up in 4G technology. The latter outcome spells good news for smartphone manufacturers across the board.

Manufacturers, such as Xiaomi and Samsung, however, are already looking at other markets for growth.

Both research firms agree that India could be that market. With its combination of a fast-growing economy and low penetration rates for smartphones, India has seen increased smartphone shipments with price-sensitive customers, who demand more for less. Therefore, a majority of the smartphones there run Google's (GOOG) Android, with Micromax, a local brand, and Samsung as the leading vendors in that country.

The trajectory for smartphone markets in India will be similar to that of China. Apple struggled to gain traction in China's relatively unsophisticated market until recently. But, the company's patience has paid off handsomely in recent years, with record growth and profits from the second-biggest market for iPhones in the world. India could be another big market for Apple. But, it needs to bide time.

"Indian consumers are not as attracted to Apple products as Chinese consumers are," says Xiaohan. "This is something that will take time to develop."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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