Apple, Samsung Rivalry Heat Up China Smartphone War

With Apple Inc. (AAPL) setting an October date for its new iPhone release in China, the battle for dominating the world's largest smartphone market is heating up. Apple's closest rival, Samsung, recently launched its Galaxy Note 4 in South Korea and China ahead of its original schedule.

However, Apple's announcement of shipping iPhone 6 and 6 plus from Oct 17 (pre-order starts from Oct 10) shattered Samsung's hope of capitalizing on the absence of the new iPhones in China.

China is one of the fastest growing smartphone markets in the world. Per eMarketer estimates, China will have the largest smartphone user base in the world totaling 521.7 million this year. By 2018, the country is expected to achieve a smartphone-majority status.

Although Chinese smartphone shipment growth is expected to slow down in 2015 and beyond, adoption of faster fourth-generation (4G) mobile networks by Chinese telecom operators like China Mobile CHL, China Telecom CHA and China Unicom CHU is a major growth opportunity. The huge demand for 4G compatible high-end handsets presents a significant growth opportunity for Apple and Samsung, in our view.

Nevertheless, intensifying competition from low-cost handset manufacturers like Xiaomi Corp, Huawei and Lenovo will continue to make it difficult for them to achieve a dominant market share.

Per research firm Canalys, China accounted for 37% global smartphone shipments – approximately 108.5 million units in the second quarter of 2014. Of the top ten smartphone vendors in China, 8 were indigenous.

The list included Xiaomi, Lenovo, Yulong, Huawei, BBK, ZTE, OPPO and K-Touch, that on a combined basis shipped 70.7 million units and took a 65% market share. Samsung and Apple accounted for 20 million units or 18% of the smartphone market in China.

Most significantly, Xiaomi surpassed Samsung as China's top smartphone maker. In the second quarter, the company shipped 15 million smartphones in China, up from 4.4 million devices from the year-ago period.

Xiaomi's market share was 14% at the end of the quarter. Samsung, Lenovo and Yulong followed with a 12% share each. However, Samsung's market share dropped 6.3% on a year-over-year basis.

Although Apple did not figure in the top vendors list in China, the partnership with China Mobile has helped it to resurface in the country. Greater China revenues grew 28% year over year in the third quarter of 2014. Most importantly, iPhone sales jumped 48% from the year-ago quarter.

We believe that Samsung's new Note 4 will boost its dwindling market share in China. For Apple, China is the fastest growing market and we believe that the company will not easily relinquish its increasing market share in the country. Although pricing will be a factor, the bigger size iPhone 6 plus can eventually make a difference in China, in our view.