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Is there significant growth still possible in the smartphone space for the big guys?
It is unlikely. The condition of the smartphone space, for anyone without a bias, should be apparent. The writing is on the wall.
If we assess the last 3 to 4 years of smartphone releases by the big players (Apple and Samsung), the increase in the utility per model has been very limited. This is the fundamental problem that the 'old order main players' are struggling with (see: So, the iPhone Is Still Hot, right? What Does the Data Tell Us?).
An increase in utility, simplistically, means a significant improvement in functionality; for example, arguably, the functionality of iPhone 11 is not very different from iPhone 12 Pro; this means that the marginal improvement in functionality, or utility, is minimal.
For a non-enthusiast, average user, the difference between the functionality of an iPhone 11 and an iPhone 12 Pro is insignificant, and this condition is reflected by the sales volume of the recent iPhone models, the sales volume never reached the level of iPhone 6’s sales volume, and is on a continual declining trend.
Due to this inability to improve utility substantially, the competition, which a few years ago, had products that the big guys could scoff at, just like Steve Ballmer, Microsoft’s ex CEO, scoffed at the first iPhone, now are “at the gates of the castle.”
If we look at recent products of companies like Xiaomi, and other Chinese manufacturers, their rate of improvement and increase in utility to value ratio p.a. is significantly higher than Apple or Samsung. With their current rate of increase in utility, utility to cost ratio, and functionality being much higher than that of the big guys (see: Are Apple and Samsung Losing the Smartphone Market? 10 Years of Data Analyzed).
Just observing the long-term rates of improvement for smartphones produced by the Chinese manufacturers, compared to the big players, the inevitability of the rise of the Chinese manufacturers and the decline of the big players becomes obvious.
Ok, this line of reasoning may be logical, but what would be a realistic projection for the industry? When will this postulated decline occur?
It is not very far away. The decline is not more than 4 years away, and 4 years in the tech space is a very, very long time. The word decline here means a very significant decrease in market share and products sold. For Apple, the iPhone sales account for more than 40% of its total revenue. It is, thus, important to mention that for an intelligent investor, this question should be very important for making adjustments in her portfolio, presently for a significant ‘price readjustment event’ in the future.
Recently, LG has put a hold on its smartphone division and is reported to be in talks with multiple companies to ‘offload’ its smartphone division. LG, of course, wouldn’t do so if its very large strategic analysis team assessed the prospects of the smartphone space as ‘rosy.’
Is this decline very likely, or is there a possibility that one of the big guys will make a ‘Rocky’ like comeback?
There is a possibility that one of the big guys makes a Rocky like comeback, but that ‘comeback innovation,’ most likely, would not be a smartphone as we know it. It would be a technology primarily based on the functionality that a smartphone provides; however, it would be a radically different product, for example, smart glasses, or something that we can’t envisage presently.
To reiterate, it would be a product classified as a ‘cycle-restarter,’ as per the ‘creative destruction’ process, postulated by Schumpeter (see: The "Creative Destruction" Process, What Is It and What It Means for Apple, Amazon, Facebook & Tesla) The ‘Creative destruction’ process theory, primarily, states that an innovator firm creates a product, service, or process that is radically different from what’s available in the market; this advantage provides the innovator firm a significant competitive advantage (like Apple with the first iPhone).
However, in the second stage, like bees, the competition, observing the innovator firm making high economic profits, ‘swarm,’ to imitate the success of the innovator firm. While many fail, just like in the smartphone space, some, over time, succeed in replicating the innovator firm, or even performing better than the innovator firm; positive economic profits, over time, thus, are eliminated with the increased competition.
The cycle can be restarted, nonetheless, with innovation and if the big guys manage to innovate out of the current stagnation, they will remain ‘in the castle’ and prevent being ‘dethroned.’
We must, nevertheless, not discount the emergent capabilities of the new key players that have emerged in the smartphone space, players like Xiaomi, Vivo, and Oppo. It is very likely that the cycle may be restarted by them, instead of the big guys. In that case . . . well, that case is not worth elaborating again for an intelligent audience. Another possibility is that a company, not presently in the smartphone space, like Microsoft or Amazon, restart the process. Presently, we cannot make any assumptions about this.
Currently, the risk attached with the big guys is very high, and now is the time to make readjustments in the portfolio, before a major ‘price readjustment event.’
The critical risk triggers for those intending to hold their positions would be mergers, acquisitions, or alliances in the smartphone space. We might see more subtle ‘offloading’ of certain elements in the smartphone divisions of the big guys as well.
Risk Concern report (Stocks)
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