Summary in Plain Language
For those who are thinking about changing their phones recently, you must have noticed: there are fewer and fewer phones priced at a thousand yuan or even a hundred yuan. Models with the same specifications have generally seen price increases of several hundred to a thousand yuan. It's not that manufacturers are collectively trying to make excessive profits; the main reason is that the cost of memory chips used in phones has nearly doubled in the past six months, effectively squeezing the profit margins of lower-priced phones.
The entire industry is currently undergoing an unprecedented reshuffle. In the domestic market, Huawei and Apple have not raised their prices much and have actually gained the largest share of users. Together, their market share has reached 41%. Other companies like Xiaomi, OPPO, vivo, and Honor are at risk of losing market share if they dare to increase their prices first. Xiaomi has suffered the most, with its shipments declining by more than 20%. The situation is even worse in overseas markets. The territories that domestic manufacturers have managed to gain in the past few years, especially in India, Southeast Asia, and Latin America, are now shrinking, with most of the lost share going to Samsung and Apple. The increase in the average phone price is not due to an upgrade in consumer demand; rather, it's because the cheaper models have been phased out by manufacturers, leaving consumers with fewer choices. As a result, more people are opting to extend the lifespan of their old phones. Both manufacturers and consumers will face even greater pressure from rising prices in the future.
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Detailed Explanation
1. The Root Cause of Rising Phone Prices: Memory Chips Are Killing Off Lower-Priced Models
Many people are puzzled by the sudden increase in phone prices. The main reason is related to the competition for resources by AI systems. AI servers are in high demand for high-end memory chips, which has led to a 70%-80% increase in the cost of the memory used in phones and the flash storage for storing photos. This is particularly detrimental to lower-priced phones, where the cost of memory can account for up to 60% of the total material cost. For phones priced below 1,000 yuan, the memory cost can exceed 64% of the total cost. For a 700-yuan phone, the cost of memory alone could be over 400 yuan. With this cost doubling, manufacturers can no longer make a profit on these models. They have chosen to discontinue them and shift to higher-priced models. It's not that they don't want to offer good value for money; it's simply that the foundation of competitive pricing has been eroded by the rising cost of memory chips.
2. Only Huawei and Apple Are Benefiting in the Domestic Market; Those Who Raise Prices First Lose Users
During this price increase, the fates of the six major manufacturers have diverged significantly. Those who can wait to raise their prices will gain the most users. Huawei was able to avoid raising prices earlier because its previous models, such as the Enjoy and Nova series, which were affected by chip shortages, are now equipped with the Kirin 5G chip, covering a wide range of prices from affordable models to flagship phones. As a result, it has gained an additional 5% market share. Apple has been even more strategic: while other Android manufacturers raised their prices, Apple kept its prices unchanged. This difference in pricing has attracted users who were considering buying Android flagship phones for 5,000 yuan to buy Apple phones for 6,000 yuan. Retailers, worried about future price increases, stockpiled Apple products, which helped boost Apple's domestic sales by 22%.
The other four manufacturers that raised their prices first have all lost market share. Xiaomi, which previously had the largest share of lower-priced models, has seen its domestic shipments decline by 21%. Even after OPPO and Honor raised their prices, they failed to attract the users that Xiaomi lost. As a result, the market share is rapidly shifting towards Huawei and Apple.
3. Domestic Manufacturers Are Losing Ground Overseas
In the past few years, domestic manufacturers have focused on expanding in India, Southeast Asia, and Latin America with their lower-priced products. However, this strategy is failing. In the second quarter, sales in India declined by 13%, and in Southeast Asia, they dropped to their lowest level since 2014, with shipments falling by 23%. Xiaomi, OPPO, and vivo all saw sales declines of 17%-26% in these markets. What's more, despite the sales declines, their market share has been taken over by other companies. In Latin America and the Middle East, Samsung, with its wide range of products and local partnerships (such as installment plans and trade-in programs), has managed to attract users who can afford mid-range phones. In Europe, domestic manufacturers have lost a total of 7% of their market share to Apple and Samsung. The top ten best-selling phones globally are all from these two companies, which together account for a quarter of the global market. Domestic manufacturers, with the exception of Transsion, are losing market share in all regions except Africa.
4. Rising Average Phone Prices Do Not Equal an Upgrade in Consumption; Cheaper Models Are Simply Disappearing
Many people think that the increase in average phone prices means consumers are willing to pay more. However, this is not the case. For example, although the average price in Southeast Asia has risen by 31%, sales of mid-to-high-end phones priced above 100 yuan have actually decreased by 2%. The main reason for the increase in the average price is the 70% decline in sales of lower-priced phones. Essentially, the cheaper models have been phased out from the market, leaving only more expensive ones. This does not indicate an upgrade in consumer demand but a lack of choices.
This situation is reflected in the financial reports of manufacturers. For instance, Xiaomi's average phone price increased by 26%, setting a new record, but its total revenue decreased by 7.5% due to fewer sales. Transsion's profits have increased, but it has accumulated 19 billion yuan in inventory, resulting in a net outflow of 5.8 billion yuan in cash flow. This situation is unsustainable as the inventory of cheaper models will eventually need to be sold, and the resulting pressure will be significant.
5. The Real Pressure of Rising Prices Is Yet to Come; Both Consumers and Manufacturers Are Struggling
The price increases we are experiencing are not the worst yet. Manufacturers are still using memory chips purchased at lower prices from a few months ago, and the products sold through channels are older models. The impact of the price increases has been delayed. Once the existing inventory is used up and new, higher-priced models are released, prices will likely rise even further.
Consumers with limited budgets will likely continue to use their old phones for another two to three years. The average replacement cycle for phones in China has already exceeded 30 months and is likely to extend even further. This will lead to a decline in overall phone sales. For manufacturers, the challenge is not just the increase in prices but also the decrease in sales volume. Only companies with a wide range of products, sufficient funds, and the ability to withstand the impact of price increases, such as Huawei, Apple, and Samsung, will survive. Smaller manufacturers will either be forced into niche markets or be eliminated in the reshuffle of the industry.