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.
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?