Phone Price Catch-22
RealMe (pvt) is a smartphone brand that was spun off of Oppo (pvt), one of the largest smartphone brands in China, and while they are relatively new (only 3 years old), it has commanded considerable attention as it has been growing rapidly, particularly in emerging markets, and has grown from a miniscule share in 2018 to over 4% of the global smartphone market currently, commanding a 12% share in India and is in the top 5 in a number of Southeast Asian countries.
While RealMe is growing rapidly, they are still facing the same issues that other smartphone brands are facing on the supply side, and do not have the same bargaining power as volume giants such as Huawei (pvt), Samsung (005930.KS), Apple (AAPL), or Xiaomi (1810.HK) to gain leverage. That said, they have been particularly up front about the rising cost of producing smartphones, particularly as their phones tend to be mid to lower-tier priced models (Their latest, the GT Neo, sells for ~$315 and they have phones priced down to $50) and recent comments by senior executives indicated that they expect prices to increase significantly in the 2nd half of the year, citing storage, charging components, and batteries as some that are seeing rapid price increases.
The company expects that these shortages will continue through the 2nd half and will push smartphone prices up by ~10% in 2H, and indicated that some local (China) smartphone manufacturers have lowered orders and shipment targets. April, as we have noted previously, was a weak month for smartphone shipments in China, down 23.8% m/m and more importantly down 34.1% y/y, after three months of positive y/y growth, although we note that those y/y comparisons were relatively easy given the timing of the initial outbreak of COVID-19 in China.
Unfortunately such a price increase would begin to erode the smartphone price declines we have seen among major smartphone brands, who are trying to appeal to a more price conscious customer, rather than feature oriented buyers, which has helped to at least stabilize the smartphone business during the pandemic. While a 10% increase might not be enough keep a replacement phone from being purchased, we expect the actual production costs in 2H could be greater than 10%, which means that the price increase will not cover the added cost. Brands will expect the retailer to share some of the reduced margin, but that just means the retailer will be incentivized to sell higher margin products, a catch- 22.
While RealMe is growing rapidly, they are still facing the same issues that other smartphone brands are facing on the supply side, and do not have the same bargaining power as volume giants such as Huawei (pvt), Samsung (005930.KS), Apple (AAPL), or Xiaomi (1810.HK) to gain leverage. That said, they have been particularly up front about the rising cost of producing smartphones, particularly as their phones tend to be mid to lower-tier priced models (Their latest, the GT Neo, sells for ~$315 and they have phones priced down to $50) and recent comments by senior executives indicated that they expect prices to increase significantly in the 2nd half of the year, citing storage, charging components, and batteries as some that are seeing rapid price increases.
The company expects that these shortages will continue through the 2nd half and will push smartphone prices up by ~10% in 2H, and indicated that some local (China) smartphone manufacturers have lowered orders and shipment targets. April, as we have noted previously, was a weak month for smartphone shipments in China, down 23.8% m/m and more importantly down 34.1% y/y, after three months of positive y/y growth, although we note that those y/y comparisons were relatively easy given the timing of the initial outbreak of COVID-19 in China.
Unfortunately such a price increase would begin to erode the smartphone price declines we have seen among major smartphone brands, who are trying to appeal to a more price conscious customer, rather than feature oriented buyers, which has helped to at least stabilize the smartphone business during the pandemic. While a 10% increase might not be enough keep a replacement phone from being purchased, we expect the actual production costs in 2H could be greater than 10%, which means that the price increase will not cover the added cost. Brands will expect the retailer to share some of the reduced margin, but that just means the retailer will be incentivized to sell higher margin products, a catch- 22.
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