The high-end development of the Android camp is stuck

The Android camp's progress in the high-end market has been slower than expected, which has to some extent affected the performance of the mobile phone industry chain in the second half of 2021.

Recently, a number of mobile phone industry chain manufacturers have mentioned in their performance reports that product adjustments or structural changes in customers have more or less affected the company's financial performance, such as annual revenue or gross profit margin.

Correspondingly, recent supply chain information shows that machine manufacturers are also gradually adjusting their orders to a certain extent. Of course, this is not only because the breakthrough of high-end machines has not yet seen obvious results, but also because of the sluggish demand in the overall consumer market.

A recent report released by CINNO Research shows that due to the impact of the macro environment, mobile phone manufacturers have begun to lower market expectations and cut orders from the mobile phone supply chain, and have reduced specifications and configurations for mobile phone products. At the same time, weak demand for high-end models and some external factors have led to a slowdown in the development of the domestic mobile phone market.

Statistics from the agency show that sales of smartphones in the Chinese market in February were about 23.48 million units, down 20.5% year-on-year and 24.0% month-on-month, shrinking both year-on-year and month-on-month.

However, Lin Keyu, a senior analyst at Counterpoint, told the 21st Century Business Herald that the adjustment of the supply chain is not a new thing for the entire mobile phone industry chain. "Chinese manufacturers have many years of experience in dealing with inventory management and have formed a scientific and systematic management framework. After experiencing the challenges of supply chain shortages in the past two years, any manufacturer tends to accumulate more inventory. At present, there is indeed a large accumulation of high-end chips or key components, which brings certain pressure. But I believe that China's leading manufacturers should be able to solve these problems in the first quarter."

Supply chain affected

The Android camp still has a long time to explore further in the process of moving towards high-end, and this has even been reflected in the performance of supply chain manufacturers.

The 2021 annual performance report released recently by Sunny Optical, a leading manufacturer in the camera field, shows that the group's revenue during the period was approximately RMB 37.497 billion, a slight decrease of approximately 1.3% year-on-year. The reason is that the shipment volume of mobile phone lenses decreased year-on-year, and due to the downgrade of smartphone cameras, the average selling price of mobile phone lenses and mobile phone camera modules both decreased year-on-year.

From the performance of Sunny Optical's main businesses, the financial report shows that the optoelectronic products business department, which accounts for about 75.6% of the group's total revenue, has only slightly decreased by about 0.6%. However, it points out that although the shipment volume of mobile phone camera modules has increased year-on-year, the average sales price has decreased significantly year-on-year due to the reduction in specifications and configuration of smartphone cameras and changes in customer structure, which offsets the revenue growth brought about by the increase in shipments.

However, the company pointed out that in the face of an unfavorable objective environment, the group continued to promote the optimization of customer structure and enhance R&D and process technology capabilities; it completed the research and development of a number of high-specification mobile phone lenses during the year, mainly including ultra-thin and ultra-small head mobile phone lenses suitable for folding mobile phones, 200 million pixel ultra-large image surface mobile phone lenses, and large image surface periscope mobile phone lenses dedicated to ultra-high-definition portrait shooting.

The financial report of another lens manufacturer also mentioned a similar trend. In its 2021 annual report, Q Technology mentioned that the group's gross profit margin for the year was about 9.4%, a slight decrease of about 0.8 percentage points year-on-year, with a larger decline in the second half of the year. This is mainly because changes in external factors have had a continuous impact on consumer purchasing power, resulting in shipments of high-end smartphones using the Android system falling short of expectations, indirectly leading to poor application and sales of high-end camera module products, affecting the average selling price and added value of related modules.

In addition, the upgrade of fingerprint recognition modules has slowed down, and the prices of raw materials for traditional capacitive fingerprint recognition modules and optical under-screen fingerprint recognition modules have dropped significantly, resulting in a significant drop in the average sales price of products.

Q Technology also mentioned that in 2021, although the company's fingerprint recognition module product sales volume was about 115 million, a year-on-year increase of about 24.6%, which was significantly higher than the growth rate of global smartphone terminals in the same period. However, the growth in the sales volume of fingerprint recognition modules was lower than the established development target, mainly because the sales volume of mid-to-high-end smartphones using the Android system in the second half of the year was lower than expected, affecting the demand for optical under-screen fingerprint recognition modules.

Continuing to the beginning of this year, not only the high-end market, but the overall market also seemed increasingly deserted during the off-season.

CINNO Research believes that the significant changes in the external environment after the Spring Festival have had a number of adverse effects on the resumption of work and production of domestic mobile phone manufacturers, and is one of the main reasons for the decline in the overall performance of mobile phones in February.

Changes in the market share of the top five brands in the domestic mobile phone market in February this year, source: CINNO Research

It also mentioned that this year, MediaTek's platform has entered the flagship market in a big way, which has also affected the flagship layout of major Android manufacturers. Allocating R&D and supply chain resources for the two platforms has become a new challenge. The yield rate of Qualcomm's flagship Snapdragon 8 gen1 in Samsung's foundry is insufficient, which affects the chip supply. At the same time, the delay in the delivery of MediaTek chips has also affected the release rhythm of new phones, resulting in the delay of the launch of some products, resulting in a product gap in the market in February.

Don't rush high-end

Along with this, there is also information that the supply chain is facing order cancellations.

Lin Keyu told the 21st Century Business Herald reporter that from the overall market perspective, the external environment has been continuing to change since the beginning of the year and consumption has been affected to a certain extent, which has caused sales to decline.

"There is indeed a gap between the original plan and the actual market reaction, which has caused different manufacturers to postpone orders for supply chain materials or adjust their focus." He continued, for example, in the mid-to-high-end market with prices above 3,000 yuan, previous forecasts would be too high. From the end of last year to the beginning of this year, many high-end products were launched on the market. As Apple's sales volume will decline slightly seasonally at the beginning of each year, Chinese manufacturers hope to seize this window of opportunity, but in fact it did not achieve the expected results, resulting in a certain amount of inventory accumulation in the first quarter.

Of course, from the perspective of consumption trends, this upward trend in average customer spending is reasonable. Lin Keyu continued that with Apple's impressive performance at the end of last year, most manufacturers want to move towards high-end products, hoping to compete for a portion of the market space. This can be seen from the fact that the current domestic mobile phone ASP has increased from 1,500-2,000 yuan to 2,000-3,000 yuan.

In the competition with Apple in 2021, the Android camp did not make any profit. Source: Counterpoint statistics

However, according to Counterpoint statistics, in 2021, the market share of Android smartphones priced above US$600 (about RMB 3,800) in China shrank from 44.6% in 2020 to 36.5%. This shows that Chinese OEM manufacturers have not successfully seized the high-end market space vacated by Huawei.

At the same time, manufacturers have not given up and continue to try new strategies such as "dual high-end" to target the high-end market. Compared with focusing on only one high-end product line, many Android phone brand manufacturers now have two or more high-end product lines. This also means that the price range above $600 has become more crowded than before.

All these factors put some pressure on the current supply chain situation. However, in the past decade of development, this is actually a challenge that the mobile phone industry chain needs to continue to face. This may comprehensively test the coordination and scientific management capabilities of the entire industry chain.

"In the past, we had to deal with abnormal conditions such as extreme weather, and Chinese manufacturers have a certain degree of resistance to supply chain management." Lin Keyu told reporters that, therefore, the current machine manufacturers do have orders or forecast adjustments to the supply chain, but this is normal. For example, when Qualcomm Snapdragon's high-end chips were first released, there was also a rush to buy them. At present, there is indeed a certain pressure on high-end chips or key components, but I believe it can be resolved soon.

According to Counterpoint, high-end smartphones must perform well in three basic aspects: display, photography and gaming experience.

Specifically, the screens of high-end smartphones need to support high refresh rates, high resolutions, and cutting-edge color accuracy; and in the era of computational photography, OEMs are improving the specifications of ANC-assisted cameras. For example, mobile phones are equipped with ultra-high-resolution ultra-wide-angle cameras or periscope telephoto lenses, and high-end smartphones also focus on collaboration between multiple cameras, which can capture more information for AI algorithm processing; in terms of gaming experience, more computing resources will be consumed than before, which will also include image quality, fluency, temperature, etc.

In addition, the agency pointed out that there are three other conditions that are not important but are favorable to high-end phones: reliable signal connection, balanced stereo audio, fast charging or battery sustainability. In addition to hardware, we can also learn from Apple and Huawei's previous exploration in enriching the ecosystem. For example, Apple Watch can enjoy online fitness courses through subscription.