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High End Android SmartPhone Market Slowing Down

July 21st, 2013

High End Android SmartPhone Market Slowing DownA shorter product cycle for Samsung Galaxy S4 indicates a saturated high-end market, and Samsung’s emphasis at mid-end might secure share and thus stimulate component outsourcing opportunities given insufficient local supply, albeit at the expense of pricing. We believe Street expectations are high for Samsung opportunities on non-Korean components.

It is broadly believed that Apple will add another version of its iPhone when it launches the iPhone 5s in 2H13. Based on our BOM analysis, we anticipate that the second phone will be priced in the US$400-450 range. We expect this low-cost iPhone to help stimulate demand for iPhones thanks to price elasticity, although it should also cannibalize the company’s own high-end segment, implying smaller volume than for the low-cost version. A rising percentage of low-cost iPhones in 2H13 suggests overall BOM cost and component prices could be just flat at best if Apple wants to defend its gross margin.

With global top 2 smartphone suppliers likely to move down the price ladder and address the middle of the market, all of above-discussed issues could cap the returns of the local OEMs as they seek to maintain sensible discounts. This implies either aggressive price cuts on commodity components or a slowdown in spec migration to mitigate the impact of margin erosion.

In our talks with supply-chain players, most felt that blended ASP would stabilize on continuing spec upgrades, and that the rapid decline in chipset pricing has contributed to the spec upgrade. However, there were some who believe that prices for panels and camera modules in general are not falling as quickly as they are for chipsets. Dual-core, 4” display, 5MP camera has become the mainstream spec, and is one of the reasons why China Mobile has shifted its subsidy from 3.5” display models to 4” models to take advantage of price declines, implying that the larger model will be its entry-level smartphone in 2H13.

Where does this Leave HTC ?
High-end saturation and severe competition in the mid-range leave HTC poorly positioned in 2H13. Unfortunately, a shortening product cycle for Samsung’s GS4 will not translate into gains for HTC. Rather, it bodes ill for pricing following Samsung’s strong push into the mid-range in exchange for share. The chain reaction is likely to pressure lower-tier players, including HTC. The sustainability of a solid product roadmap is in question, especially following the recent management reshuffle. The dilemma of product innovation vs. risk control (supply-chain management) has made it hard to focus on the right direction.

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