Changing State of Smartphone Competition in China

Will Android, a “little rice” and lot of cheap “China Droids” overwhelm Apple’s plans for China?

Xiaomi (“little rice” in Chinese) has just released a new Android phone priced at 799 renminbi ($130). The phone, called “Red Rice,” has good specifications, and one Chinese commentator said that the pricing was so aggressive and that the phone could do so much damage to competitors and component suppliers that it really should be called “Blood Rice.”

Apple reported disappointing results from China in its recent quarterly earnings report. The iPhone is no longer the most sought after phone in the country, and the company still does not have a relationship with China Mobile, the country’s largest mobile operator. Tim Cook, Apple’s chief executive, recently visited Beijing and met again with the chief executive of China Mobile, but no deal was announced.

When the iPhone 4 was the hottest phone in the world, Apple might have had some leverage in negotiating a favorable deal with China Mobile. But that is no longer true. The top end Android phones have caught up, and until Apple upgrades the iPhone with a bigger screen and a new look, it seems unlikely that it can reignite the crazy desire its phones once aroused in China. The iTunes ecosystem “lock-in” effect is also weak in China, making it easier for consumers to switch phones.

Rumors abound that Apple is planning to release a cheaper version of the iPhone. China is flooded with cheap Android phones that continue to get better and cheaper, and Xiaomi’s Red Rice is the latest example, with better marketing. China Mobile has also just announced its own brand of smartphones, priced at 1299 renminbi ($212) and 499 renminbi ($81).

Google’s Android operating system is mostly de-Googled within China, so while its proliferation may not directly benefit Google’s bottom line, it is damaging the prospects for Apple in the world’s largest phone market.

As this column noted last week, in the midst of the surge of downbeat views about China’s economic prospects, at least one sector, the Internet, has offered good returns to investors over several months. The surge in mobile usage has also led to huge interest in mobile game developers listed on the Chinese stock markets, and the top six of those companies have seen their share prices double or more so far this year.

The explosive growth in mobile and Internet usage is one of the factors driving the relative strength in nonmanufacturing activity. Some officials are that there is more consumption than the official data suggest. The Wall Street Journal recently quoted the People’s Bank of China deputy governor Yi Gang as saying, “The official data severely understates household consumption.”

There is still plenty of data to fuel bearish arguments that China is heading for a much harsher slowdown, but the government appears to have drawn the line at how big a drop it will allow while pursuing what it now almost daily says is the needed restructuring and reform of various sectors and the economy overall. China’s Politburo met last week and, according to the official statement, the government plans to keep growth steady in the second half of this year, amid the “extremely complicated domestic and international conditions.”

One way to stabilize growth is through the “mini-stimulus” discussed in last week’s column. Another may be what appears to be a “monetary mini-stimulus,” as described by the Financial News, a newspaper affiliated with the People’s Bank of China.

The newspaper ruled out any move to cut the reserve requirement in the near-term, but said the central bank’s resumption of injections signals its willingness to support the market. “The central bank is telling the market it will maintain the stability of money market rates, and that banks don’t need to deleverage too aggressively on concerns of a shortage of liquidity,” the newspaper said.

“China’s Coming Muddle Through” would never sell as a book. Nor does it make for a good TV soundbite about what is going on in China. But it may be the most likely outcome for the economy.

The Capital Economics research firm wrote an excellent note on Aug, 1 asking, “How Close Is China to a Crisis?” The report, publicly available as a PDF, is a cogent look at the current state of economy from a firm that two years ago predicted sub-8 percent growth for China in 2013, well ahead of many other economists. The short answer to its question is “not too close.”

The economy will not be pretty going forward, but in the 24 years I have been in and out of China, I can not actually think of a year where things were ever smooth. Muddle through has worked in the past, and there is a good chance it will work in the future, even if that position will not get me a book deal.