Nestled in the hills of Shenzhen in southern China, stands a factory that churns out smartphones day and night. Migrant workers labor for fourteen-hour shifts, six days a week. Most welcome the overtime, which is usually paid. Components stand around in cardboard boxes piled around the edges of the factory: MediaTek chipsets, touch screens, 8GB of flash memory, and a generic black plastic case. After assembly, the device will be flashed with a modified version of Android Ice Cream Sandwich that’s stripped of all traces of Google and pre-loaded with about forty Chinese apps. One ChinaDroid is ready for sale.
This is the future of smartphones in China, and the most important development in China tech in 2013. Unlike our previous predictions at TechRice, Weibo in 2011 and Weixin in 2012, this isn’t an Internet service. But it’s a critical gateway for Internet content providers. And unlike our previous predictions, this one really matters outside of China.
Moving From Samsung to Oppo
Lei Zhang, the CEO of Tapas, described a cycle for each new generation of mobile phones in a talk one year ago. First, foreign brands establish the market. Second, Chinese brands rise to the top. Third, hundreds of small no-name Chinese manufacturers take over the bottom and middle of the market. Zhang sees this pattern in dumb phones, feature phones, and now in smart phones too.
The first transition, from foreign brands to to local brands is underway. Lenovo is predicted to overtake Samsung as China’s best-selling Android brand this year.
The second transition into no-name devices is coming on even stronger. ‘Other’ now accounts for 39% of Chinese Android page views on Baidu properties, and growing. Analyst Benedict Evans writes: “‘Other’, the swarm of over a thousand small manufacturers making generic devices with (mainly) Mediatek chipsets, is squeezing all the branded OEMs and pushing prices down relentlessly.” These devices are not high-end, but most aren’t shanzhai either. They’re not knockoffs of the iPhone or Samsung Galaxy. They’re selling a generic, commoditized version of the Android smartphone. They’d like to sell their own brand, but they don’t have to: Android is the brand (although the Chinese consumer’s image of Android is very different from an American’s).
In China, new phone = Android. With entry-level Android smartphones priced at 500 RMB (80 USD) and dropping, smartphones will soon be the only phones sold in China. And Android now accounts for about 90% of smartphone sales in China, according to Analysys.
Moreover, China is sprinting ahead of the rest of the developing world in adopting smartphones. In 2013, Canalys forecasts 240 million smartphones in China. That’s over 3X the forecast for the rest of the ‘BRICI’ members (Brazil, Russia, India, Indonesia) combined (78 million)! And that’s a conservative forecast for China–IDC forecasts 301 million shipments, which means China would account for a full one-third of the global total. It’s China, and the rest of the world.
When Yaping Liu, the lead of our product team at Wandou Labs, visited factory workers in Dongguan he found that their dream device isn’t an iPhone. Nor is it a Samsung Galaxy. It’s the 2000 RMB Xiaomi, although for most it’s just a dream: they can’t afford it. Even among those who have the cash, most don’t the time or the savvy to nab one in the few minutes before Xiaomi’s scarce supplies sell out. Instead, they buy a device from a no-name manufacturer at about half the price.
The ChinaDroid supply chain also has big implications outside of China. All of the big foreign brands do their manufacturing in China, meaning that components and expertise are concentrated in this country. Even the Aakash, the first “made-in-India” tablet, was largely made-in-China. China is truly the world’s factory for smartphones and tablets.
And now China’s moving up the value chain. In developed markets, big Chinese brands like Lenovo, Huawei, and ZTE are now selling directly to consumers. Huawei is the world’s third-largest seller of smartphones, behind only Samsung and Apple. It’ll take years of sustained marketing to crack developed markets, but could eventually bear fruit.
I’m far more bullish still about Chinese brands selling to consumers in the developing world. Consumers there are first-time smartphone buyers, for whom the only resonant brand is Nokia. And while Nokia dickers around with Windows phone, their market evaporates.
Most have never heard of these smaller Chinese brands like Oppo and Livall, and G’Five. Many avoid the ultra-competitive domestic market altogether. But they’re selling millions and millions of Android smartphones and tablets in the developing world. Benedict Evans writes: “These devices are like dark matter: everyone suspects there are a lot of them, but no-one quite knows (publicly) just how many. I’ve seen credible people claim it could be well over a hundred million units in 2013. Possibly much more.”
Hardware as the Gateway to Content Delivery
There’s a fortune to be made in hardware sales. Just ask Samsung. But these devices are a critical gateway to an even bigger prize: content.
The value of content consumed on Android devices will explode in the coming years. It’ll start with in-app purchases in games and ads viewed while browsing, but it’ll soon become the terminal of choice for e-commerce and the decision point for offline retail purchases too. That’s why Amazon sells its Kindle devices at such a low price: it can make much more on content sales than the device itself. And that’s why all of China’s Internet heavyweights like Tencent, Baidu, Alibaba, and Qihoo are now partnering to build their own smartphone. Especially those that don’t yet have a strong entry point onto the smartphone (here’s looking at you, Baidu and Alibaba), will try to buy one by releasing their own subsidized devices or paying other manufacturers to pre-load their apps. Google absence has created fierce and chaotic competition to control content delivery channels in China.
Just as they do at home, Chinese manufacturers will start replacing Google apps on devices bound for the developing world. Rather than paying a license fee for Google’s suite of apps (Gmail, Maps, Chrome, etc.), these manufacturers want someone to pay them for pre-installs. Benedict Evans asks: “How many of these devices will have Google Play? How many users will install Google Maps? How many will come with a third-party web browser (from Tencent, say), one or two of the dozens of major Android app stores operating in China, or Amazon’s app store?” Expect to see Android devices in Jakarta, Addis Ababa, and Tehran that experiment with alternatives to Google apps.
Say hello to the ChinaDroid.
Disclosure: I work at Wandou Labs, an Android app store and search engine.
tips [at] techrice [dot] com