China's position as the world's leading producer of smartphones is now in jeopardy

Beijing: Smartphone manufacturing is one of the few sectors that best exemplifies China's central position in global supply chains; In 2021, two out of every three smartphones produced worldwide were made in China.

Last year, one out of every four smartphones sold worldwide was bought by a Chinese customer. This gives local brands such as Xiaomi, Huawei Technologies Co., Oppo, and Vivo a large domestic market to grow before expanding overseas to compete with the likes of Apple and Samsung Electronics.

However, as factories experience reductions in production orders and local smartphone brands struggle to persuade consumers to buy their latest models amid a slowdown in the economy, China's smartphone market has had a long cooling supply chains. Sending shivering.

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According to an executive at a smartphone supplier in southern China's Guangdong province, general discussion about smartphone brands and suppliers has waned and customers are now very conservative about incoming orders after reviewing forecasts for the coming year. are guessing.

The executive, who wished to remain anonymous since not authorized to speak with the media, said, "We will no longer know how many [handsets] we have to produce until next month from our customers, because We have customers. There is no clarity on how much they can sell." His current predictions are purely symbolic, and the real question is how will future COVID-19 policies affect consumption power.

This year, orders for the executive's manufacturing company were reduced from 20% to 30%. The Russian invasion of Ukraine and the strict Covid-19 lockdown in Shanghai in March crushed the confidence of factory customers, according to the executive, some of China's biggest domestic smartphone brands, who were optimistic about 2022 shipment volumes.

According to the executive, all Chinese smartphone brands have been affected to some extent, which has impacted various aspects in the supply chain. According to us, less than 80% of orders were completed according to production schedule.

The China Academy of Information and Communications Technology reported that domestic shipments in the first seven months of 2022 fell 23% from a year earlier to 153 million units. According to Counterpoint Research's most recent global forecast, smartphone shipments will reach 1.36 billion units this year, down from 1.39 billion in 2021.

Players in China's domestic smartphone market and their ambitious plans for 2022 have been hit by this turn of events, with many planning to foray into the high-margin, premium handset segment.

In February, Xiaomi announced that it would intensify its global competition with Apple by focusing on the high-end market. The Hong Kong-listed company reported that Xiaomi's handset shipments declined 26.2% in the second quarter, and a Fitch report predicted that the company's overall shipment growth would slow to a low-teens-digit rate in 2022.

With a greater focus on the high-end market, the rapidly expanding Chinese smartphone maker, Realme expects to achieve 50% growth in global sales for 2022 to match the growth rate experienced last year.

Realme Vice President Xu Qi cut the company's revenue growth target for the domestic market by 30% in March while maintaining its overseas target at 50%, when China was hit by its worst Covid-19 outbreak since early 2020. was in

The impact of COVID-19 and the strict lockdown measures taken to contain its spread are enormous. An Omicron variant outbreak in Shanghai prompted a stringent lockdown in April and May that partially cut off neighboring provinces that are home to a lot of smartphone manufacturing.

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Since then, China has continued to implement its dynamic zero-Covid policy, placing more cities under lockdown and turning to widespread nucleic acid testing as a containment strategy. This has contributed to the slowest rate growth in the country's economy as it contracted by 6.8% in the first quarter of 2020 or only 0.4% in the second quarter.

Moving to the high-end [segment] was one of the major trends [for smartphone brands] starting in the fourth quarter of last year. According to Evan Lam, senior analyst at Counterpoint Research, few had any idea that the situation would turn so dire.

According to Lam, in the first half of 2022, this resulted in reduced orders and, in some cases, no new orders for the smartphone value chain, particularly suppliers of high-end Android products. The Android OS is a mobile operating system built on Linux that primarily powers non-Apple smartphones and tablets.

Due to clients' excessive stockpiling as a result of more upbeat forecasts, producers of some key components for mid- and high-end products, which typically have a lengthy procurement cycle, are no longer receiving new orders, according to Lam.

Lam added that because smartphone users are clearing out inventory, manufacturers of display and camera modules are under more pressure.

Sales of handset lenses fell 9.1% in the first half of the year at Sunny Optical, the largest manufacturer of camera modules in China for popular smartphone brands like Apple and Xiaomi, "due to weakening demand in the global smartphone market and a downgrading of specification and configuration for smartphone cameras."

BYD, an electric vehicle and smartphone manufacturer based in Shenzhen, saw a 4.78 % decline in revenue from handset assembly and component sales in the first half of 2022.

Semiconductor Manufacturing International Corp, the largest chip manufacturer in China, has already issued a warning about lower production as a result of the Covid-19 lockdown in Shanghai, one of its main manufacturing bases, as well as weak downstream demand.

Co-CEO Zhao Haijun stated earlier this year that "many orders [from smartphone manufacturers] have been cancelled." Chinese smartphone vendors might cut back on this year's shipments by 200 million units.

Major Chinese Android phone manufacturers have reportedly reduced orders for 270 million units for the first five months of 2022, according to two reports by Kuo Ming-chi, an analyst at TF International Securities.

Although it is typically peak season, Kuo estimated that MediaTek has reduced orders for mid-to-low end 5G chips by 30 to 35 percent for the fourth quarter and Qualcomm has reduced orders for high-end chips by 10 to 15 percent for the second half of 2022.

Given that many manufacturers are expanding their assembly operations outside of China, the ongoing uncertainties and disruptions could have longer-term effects on China's long-established smartphone supply chain.

For instance, after Covid-19 lockdowns in Shanghai and neighbouring regions disrupted production, Apple moved some of its iPad production from China to Vietnam in June, according to Nikkei Asia. 

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In the first quarter of 2022, iPhone production in India increased by 50% on a year over year basis. According to Indian media reports, this was made possible by Apple's choice to produce more iPhone 13 models at a Foxconn facility close to Chennai.

According to Lam of Counterpoint, "the moves are initially motivated by the need to diversify to lower the supply chain risks." "However, I anticipate a slow pace. To create a value chain as developed as China's will still take time.

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