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Tracing the Future of the Smart Device Market

A truism in consumer electronics (CE) and technology, much as with cars, is that, once you've bought a high-end item, it has started its depreciation route, and the next model — new, better, and faster — is right behind you. This is a rather disturbing consumer experience, but it has fueled demand in both industries and will likely continue to do so.

The situation in the smart device world is continuing this trend. Importantly, it is also squeezing the middle, where low-cost smart devices are becoming reasonably competitive with high-end smart devices.

Rise of the low-cost smart device
Until recently, smartphones were really the domain of high-end, leading-edge mobile CE devices, and they came with similarly high-end price tags. The “feature phone” market remained the lower-cost alternative domain, but at the sacrifice of many features (despite the name “feature phone”) and especially at the expense of Internet connectivity. This difference between high-end and low-end mobile devices was embodied in the “smartphone” and “feature phone” labels.

As a result, the feature phone class was mostly neglected in terms of both hardware and software advances. The quick rise in popularity of a new, lower-priced tier of smart devices has expanded globally and is changing the competitive landscape for OEMs. That's because the demand for smart features and smart technology is coming from the lower device and pricing tiers. New designs and different supply chain strategies are needed to meet lower pricing and richer feature demands. The sheer volume of new customers who can no longer be ignored is pushing these changes, especially now that market saturation is slowing high-end smart device cycles.

(Source: Huawei)

(Source: Huawei)

In response, new devices are hitting the market and giving new OEMs a market opportunity. One prime example is the quick rise of the Chinese smart device OEM Xiaomi. This company has outpaced Samsung in China and has strategic eyes set on global expansion in emerging and developing markets. Huawei is another rising Chinese OEM in this market. Similarly, we are seeing competitive moves by Nokia, Motorola, Lenovo, Acer, and other global OEMs eyeing the low-cost smart device market.

New market strategies alter the supply chain
A question to be asked about this CE change is how the shrinking difference between high-end and low-end smart devices will affect the premium OEMs. The answer actually affects the entire semiconductor supply chain.

The broader supply chain is affected because end-device pricing pressure trickles up the chain, level by level, as margins are squeezed razor thin and innovative solutions to reduce costs are pushed to the top of the list over latest and greatest technologies and shrinking nodes. Whatever can be curbed cost-wise is curbed, and whatever can be used from previous generations of technology is maximized to get the advantage of already falling prices.

One very important change in market patterns is that we are seeing the latest and greatest technology being disfavored over lower-cost, previous-generation technology. The next-generation technology brings with it, not only the risk of consumer interest, but also the inevitable depreciation in value when the next architectural level comes out, just like in the opening example of a car being driven off the dealer's lot. Incorporating previous-generation components into new device designs is an important and growing trend in the CE device supply chain to meet the demands of feature-rich but low-cost smart devices.

This design option is made all the more valuable when we consider that today's next-generation processors are not quantum leaps from their predecessors, unlike even three or four years ago, when the differences between generations were truly noteworthy. At this point, last year's CPU/GPU chipset is still a very capable platform and keeps the lower-cost platform in play.

Race for a new leader
The competition to be the leading smart device OEM is thick and becoming more heated as we move forward into the fall cycle, the busy sales period for the semiconductor and electronics industry. Already in the beginning of August, Xiaomi overtook Samsung as the leading smartphone retailer in China. These direct competitive moves from low-cost device OEMs haven't changed the decision by Samsung and Apple to hold on to their high-cost market approaches with their fall device releases. Certainly, there are new features in the new high-end smartphones, but the questions are many. For how long? For how many consumers? And will the difference in features outweigh the greater difference in price, even in prime market segments?

In demand are turnkey inventory and sourcing strategies focused on lower costs and reduced margins to meet lower-priced smart device requirements. A follow-on question: What impact will these pressures have on the rate of new technologies coming out in volume? This is particularly important if we think about how costly equipment upgrades have become. Price pressures could further reduce the rate of return on investment if consumers choose not to purchase leading-edge, high-end devices.

Since lower-priced options that are still very feature-rich are available, will that slow leading-edge device releases? Will a second-tier smart device supply chain strengthen and gain in sales volume? After all, there are potentially billions of consumers waiting for lower-priced, reasonably feature-rich smart devices in the densely populated emerging and developing economies. This market push and potential focus switch is particularly noteworthy, since the high-end smart device markets are showing real signs of saturation and slowing. Could this be a watershed moment for the smart device market?

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17 comments on “Tracing the Future of the Smart Device Market

  1. Hailey Lynne McKeefry
    September 9, 2014

    The questions you ask are important ones. For the semiconductor manufacturers, chips supporting high end features are the ones that offer compelling margins (and also often carry the longest lead times). If user are satisfied with feature-rich mid-tier products, I could see it hurting those semi makers who rely on custom product business.

    I'd love to hear what advice our readers or you, Ken, have for OEMs, contract manufacturers, and chip makers in terms of staying agile and flexible in changing market conditoins.

  2. Ken Neusaenger
    September 12, 2014

    There are many questions to be addressed still, and most of the strategies for how the supply chain will handle the influx of demand for lower-priced devices are a bit of a wait and see. A handful of noteworthy companies are directly targeting that pricing market, and having great success.

    Diversification and an acute recognition of the different demands consumers from different tiers will have is essential. Inventory management just increased in complexity and that's where agility is critical. Supply chain partners, especially global electronic component distributors, provide agility. The global leaders in electronic component distribution can support rapid fluctuations in demand, pricing, and availability while safeguarding both quality (through in-house labs) and inventory levels (through hubbing and related services). Agility and flexibility in today's volatile markets demand strategic partnerships to leverage the core competencies that the different supply chain partners hold. Independent Electronic Component distributors are a great example of where many have turned to buffer risk and improve agility in the global market.

  3. Daniel
    September 13, 2014

    “There are many questions to be addressed still, and most of the strategies for how the supply chain will handle the influx of demand for lower-priced devices are a bit of a wait and see. A handful of noteworthy companies are directly targeting that pricing market, and having great success.”

    Ken, quality also important; otherwise they cannot sustain in market for a long term.

  4. Ken Neusaenger
    September 15, 2014

    @Jacob:

    You are absolutely correct, quality is of the utmost importance in the supply chain. With the commoditization of devices and components targeting a growing, lower-priced device market, ensuring that the components are of top quality, and safeguarding the supply chain from counterfeit, fraudulent, and substandard parts is so very important. The chances do actually increase for counterfeit components to be introduced when market volume increases quickly and new supply chain connections are also quickly made. That is, again, as you point out, why knowing you are working with industry certified, and long-standing, respected electronics component distributor is critical – and especially one with in-house testing capabilities. If end-devices are compromised because of counterfeit or substandard parts, then quality issues will undermine not only the OEMs, but the entire supply chain.

  5. SunitaT
    September 17, 2014

    Quality control becomes increasingly difficult with so many factors to consider. Right now the supply chain management system is going through a tough time making important decisive calls about how the amount of products churned out will be used (or potentially misused because manufacturing electronics comes with enough ethical overhead). Black markets add blaze to the fray.

  6. SunitaT
    September 17, 2014

    @hailey: I think having a new degree of product manufacturing i.e. smart devices would have to mean that the electonics supply chain would have to be modified to cope up with smart devices being launched. And users are never satisfied. Most people do not understand the difference between a Snapdragon 400 and a Snapdragon 800 except the fact that companies state it is better (with flashy clock speeds). If there is enough marketing on the behalf of those companies which sell custom goods, then customers would, in no time, be attracted to this.

  7. Daniel
    September 19, 2014

    ” quality is of the utmost importance in the supply chain. With the commoditization of devices and components targeting a growing, lower-priced device market, ensuring that the components are of top quality, and safeguarding the supply chain from counterfeit, fraudulent, and substandard parts is so very important. “

    ken, exactly what i meant.

  8. Hailey Lynne McKeefry
    September 19, 2014

    @tiriapur, the line in front of the AT&T store near my house this morning attests to the power of marketing. It stretched all the way around the block.

  9. Hailey Lynne McKeefry
    September 25, 2014

    I agree that independant distributors have a part to play in this market, a crucial part. Especially in the smart device market, where it seems that the components can go EOL very quickly. Too, many new products are being designed by innovators with little experience getting a product into manufacturing. They are going to need help with the complexity that naturally will arise from this lack of experience.

  10. Eldredge
    September 25, 2014

    Since lower-priced options that are still very feature-rich are available, will that slow leading-edge device releases?


    It seems likely that, eventually, economic pressures would slow the release of new devices. But I am often amazed at the acceptance of new devices in the marketplace. I guess only time will tell.

  11. Ken Neusaenger
    September 30, 2014

    The points raised are all very important and ring very true. What I find interesting and compelling is exactly the fact that new devices with latest generation chipsets are not only continuously released, but are readily demanded when marketing and features align for the consumer. If we consider the important point, as tirlapur also pointed out, the “need” for these latest generation chipsets is not a processing or functional need, per se, for standard consumer use (enterprise and industry is a different matter). After all, the smart devices I have on my desk right now, while a couple of generations old already, would certainly still qualify as very leading edge in developing markets, and likely many emerging markets.

    So, the next question is, as Hailey underscores, given the plethora of chipsets that continue to enter the market place, and the ASP decline of older generation components (but still highly viable chipset solutions for devices), there is a growing role that independent distributors can and are playing in the global semiconductor supply chain. Leading independent distributors, and here I mean those distributors like Smith & Associates who put quality first (as Jacob's and my comments underscore), ARE a legitimate sourcing channel for lower-tier devices. This is particularly true, as Hailey points out, now that obsolescence continues to accelerate at a rapid pace and so chip generations cycle more quickly than before. The “older” chips are still in demand for repair and warranty services. Additionally, these older chips create opportunities for lower-cost smart devices for lower-priced device markets globally. Of course, having a quality sourcing and services partner remains essential – lower-priced doesn't mean lower quality, volume and older chips require an even higher level of anti-counterfeiting diligence and testing.

  12. Ashu001
    September 30, 2014

    Ken,

    I could'nt agree more!

    I am sure you almost must have noticed there is a big industry where Stolen Smartphones are exchanged only for their Spare Parts on the Grey Market today!

    Older Chips might become Obsolete when it comes to foundries,etc but you need some in Stock to take care of Emergency Contingencies and Warranties.

    Its a fundamental and unavoidable fact currently!

  13. Ashu001
    September 30, 2014

    Hailey,

    Can't really do much about Blind Fans can we?

    Here's an awesome Spoof by Jimmy Kimmel ,I keep sharing with Friends when anyone raves about an iPhone-Like ever! http://www.youtube.com/watch?v=oprUI6nupfc

    Must-Must Watch!

    Great to know most of us here on EBN are'nt part of the same crowd!!!

  14. Ashu001
    September 30, 2014

    Hailey,

    The important issue is what happens if Consumers are forced to buy Mid-Tier Phones because of Economic issues.

    I was reading that the Government in UK (as well as other European Countries) are cutting Benefits ,etc which they were paying Citizens to cope with the Recession in 2008.

    In addition,America is withdrawing QE which means Cash won't be as easily available as before.

    That changes things sharply for all those folks used to Easy Money as well as Easy Credit.

    If Interest rates do rise(as I expect them to over the next year or so),consumers will hesistate before Buying all those High-end /High-Margin Products .

    What happens to their Development Cycles then?

    Not so predictable then.

  15. Ashu001
    September 30, 2014

    Ken,

    Could'nt agree more-Agility & Flexibility are Key paramaters in the Supply Chain.

    Are you tracking the Issues Apple recently faced with the iPhone?

    It seems that there was a severe Shortage of Screens (because of some Earlier Defects in their Manufacturing Cycle) which has delayed Shipments Heavily.

    Do you feel this is something which could have been managed better and with less inconvenience for the Consumer involved?

    What about all those Stories about Bending iPHones???

     

  16. Ashu001
    September 30, 2014

    Ken,

    Do you feel this QUality Battle is something which can be won?

    I mean look at how all those Fakes are overwhelming most Systems today.

    Just scary if you really ask me.

  17. Hailey Lynne McKeefry
    October 22, 2014

    @Ken, your points are all well taken (particularly since much of it is agreement with me 🙂 ). I also see a shift that wearable technologies are being designed using proven chip combinations from the more general IoT space. that means that the design in is coming later for a device that is already short-lived already. Clearly, we have to come up with better ways of dealing with these new realities.

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