Commentary / Japan | SENTAKU MAGAZINE

As smartphone sales sink, Asian suppliers feel the pinch

Worldwide factory shipments of smartphones last year dropped from the previous year for the first time, signaling a change taking place in the smartphone market, which had been expanding by leaps and bounds since Apple Inc. of the United States launched its first iPhone in 2007.

The drop is attributed to a number of factors, including a rise in the average price resulting from the incorporation of advanced features and the drying up of new technologies and functions. But a more fundamental cause is that consumers are getting weary of smartphones.

The past few years saw a sharp increase in the number of users not fussy about the brand, design or model year of their smartphones. This has not only made smartphones just an ordinary commodity item but also has severely impacted smartphone makers, component suppliers and the application industry.

“Our production line may remain idle until this coming summer,” says an insider of Nitto Denko Corp., which produces deflector plates, touch sensors, protective films, adhesion sheets and other multi-layer components of smartphones.

Placing great expectations on the iPhone X launched by Apple last November, Nitto Denko complied with the American firm’s request and starting last summer drastically increased production and built-up inventories.

But the sales of that new model lost steam within weeks of the launch and since late last year Apple has been revising downward its projection for purchases from Nitto Denko almost on a weekly basis. In March, Apple “advised” Nitto Denko to stop its production line and instead ship products from its inventories.

This kind of situation is affecting not only Nitto Denko but also all other manufacturers supplying smartphone components and materials to Apple. They include big names in the electric and electronic industries like Murata Manufacturing Co., which produces laminated ceramic condensers and ceramic resonators; Alps Electric Co., a manufacturer of actuators; Japan Aviation Electronics Industry Ltd. and Hirose Electric Co., both suppliers of connectors; TDK Corp., which makes lithium-ion polymer batteries and inductors; Sony Corp, a producer of CMOS active pixel image sensors, which are the core components of cameras; and Nidec Corp., which supplies vibration motors.

Two factors have been cited as the causes of the iPhone X’s sluggish sales. One is its high price — ¥140,000 for the version with 256-gigabytes of storage. Another is Apple’s failure to offer as many new features as had been anticipated. But the fundamental factor is the saturation of the smartphone market.

According to International Data Corp., an American market survey firm, global sales of smartphones last year dipped by 0.1 percent from the previous year to 1,472.4 million units. Gartner Inc., another U.S. survey company, placed last year’s sales total at 2.7 percent over the year before. But it reported that the final quarter of 2017 suffered a 5.6 percent drop from the corresponding period of the previous year.

The smartphone market, the growth of which has long been taken for granted, is now entering an age of contraction for the first time. Especially noteworthy is the change taking place in China, the world’s largest smartphone market. The China Academy of Information and Communications Technology (CAICT), a government-run think tank, says that the number of smartphones sold in China last year fell by 11.6 percent from the previous year to 461 million. Although China had experienced a decline in 2004, this was the first time that the sales total had plummeted by double digits. The situation has become even more serious this year with the first quarter witnessing a 27 percent decrease.

The saturation of the smartphone market is a mirror image of what is happening to personal computers. Although PCs are still being used in every corner of the world, demand for them worldwide has shrunk for six straight years since hitting a peak in 2011. That year, the number of PCs sold around the world, including both desktop and laptop types, stood at 365 million, according to Gartner. Last year, though, the total plummeted to 263 million — less than three quarters of the 2011 figure. Also last year’s total was smaller than in 2007, when the iPhone ushered in the age of smartphones.

During the same 2011-2017 period, the world’s population increased by 700 million and global gross domestic product total went up by 38 percent. But the PC market contracted.

As PC sales continue to decline, it has even been predicted that by 2020 they will fall short of 250 million. It is no longer unusual for consumers to keep using the same PCs for five to six years because old models cause no problems as far as functions are concerned. Perhaps more importantly, there no longer is any need to remodel hardware to keep pace with the introduction of one new version after another of Microsoft’s Windows operating system.

Demand for smartphones is following a similar pattern. The market may continue to grow in countries like India where large numbers of feature phones are still in use. Such growth can be expected only in South Asia, Latin America and Africa. But in these regions, consumers attach importance to low prices rather than to performance and keep using their phones longer than in advanced countries. Therefore in such markets a dramatic rise in smartphone sales, as has been seen during the past decade, cannot be hoped for.

In April, Counterpoint Research, an American market survey firm, released a shocking report that 86 percent of the world’s total profits from sale of smartphone terminals is concentrated in the hands of Apple. In terms of model-by-model profits, eight Apple models, including the iPhone X, ranked among the world’s top 10. This means that dozens of other companies, including Samsung Electronics Co., Ltd. of South Korea and Huawei Technologies Co., Ltd. of China, are dividing among themselves only slightly more than 10 percent of the total global profit.

Even Samsung, which has a 25 percent share of the world smartphone market, makes higher profits from selling organic electro-luminescence displays to Apple than by selling its own Galaxy smartphones. This shows that the key to the future of the world’s smartphone-related industries is whether Apple can expand its sales.

In the same boat with Apple are Japanese electronics manufacturers whose products account for nearly 30 percent of the iPhone X’s component costs. South Korean counterparts account for 15 percent and Taiwanese counterparts 10 percent plus there are two assemblers in Taiwan — Hon Hai Precision Industry Co., Ltd. and Pegatron Corp.

The future of Japanese suppliers of components for smartphone makers other than Apple also depends on how Apple’s products fare in the market because non-Apple smartphone makers can hope to boost their sales only when Apple has a market hit.

If the iPhone X’s sales lead to a collapse of the smartphone market bubble, Japanese electric and electronic industrial companies will suffer a setback in their strategy of surviving as component suppliers after having lost the battle in the finished-product sector. They may suffer a total defeat and ruin.

This is an abridged translation of an article from the May issue of Sentaku, a monthly magazine covering political, social and economic scenes. More English articles can be read at www.sentaku-en.com