By Jerry Shih
August 10, 2012
On a recent family vacation to Yellowstone National Park, I was unable to use my smartphone due to a lack of fast mobile broadband service. I survived, but being “disconnected” for a full week made me realize how my phone has become an indispensable part of my life. Smartphones—cell phones with processors to support operating systems running multimedia programs, Internet access and third party applications—have become essential to consumers in developed markets. In fact, smartphones are so important that according to a recent Google study, 33% of people surveyed in the U.S. said they would rather give up TV than their smartphones.
The smartphone phenomenon is not limited to the U.S. I recently went to Beijing, Shanghai and Shenzhen and met with component suppliers, handset vendors, telecom operators and telecom regulators to better understand the dynamics of China’s smartphone ecosystem. From my discussions, it was clear to me that smartphone usage is rapidly increasing in China, and that there are numerous opportunities for businesses. Telecom operators benefit from higher average revenue per user as people go online with their smartphones. Handset vendors and component suppliers benefit from higher pricing because of more sophisticated hardware and software. And with such a rise in usage, consumer behavior data becomes more accurate and valuable for advertisers.
The pricing environment, however, has been awful—company margins have been squeezed because firms have been spending more money to make better phones while having to still cut selling prices in a fiercely competitive landscape. The higher profitability of smartphones relative to other products they make helps companies justify the price cuts, but the trend is hardly sustainable over the long run. In addition, Internet companies, which had not competed in the handset market previously, are now entering this market because smartphones are taking up a bigger share of consumers’ time spent online. The entrance of these players, which typically have strong balance sheets, adds another layer of complexity to the already dynamic ecosystem.
The rising penetration of smartphones in China is exciting. But while the opportunities could be vast, investors still need to be selective in picking companies with sustainable business models that could survive the intensely competitive landscape. The trend also begs another important question. According to the Google study, 54% of people surveyed in China said they would choose their phones over their televisions. What else would Chinese consumers be willing to give up for their smartphones?
As of June 30, 2012, Matthews Asia Funds held no positions in Google Inc.
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