China smartphones – Huawei phone home.

Apple and Huawei now dominate their parts of the China market.

• Although shipments have declined by 17% YoY both Apple and Huawei have flourished in the Chinese market gaining significant share at the expense of almost everybody else.
• Data from Counterpoint (see here) indicates that the source of Huawei’s great H1 2020 results was a market share gain in the home market.
• This makes complete sense as no one in their right mind outside of China would buy a Huawei smartphone because there is no Google ecosystem installed on it and all methods to install it post-sale have been thwarted.
• Furthermore, there is great uncertainty with regard to Huawei’s position in the 5G roll-outs in its core European markets and so it is in China where most of the action has been.
• Apple lost a little bit of market share (9%) in Q2 2020 compared to Q1 (10%) but is still looking at a very solid gain compared to Q2 2020 (6%).
• This is probably due to two factors.
  • Firstly, price: Apple has cut the price on a number of its devices making them more accessible to the mass market.
  • Secondly, high-end: The economic problems and falls in income are disproportionately falling on the mid and lower end of the market who would not have been able to afford Apple’s products.
  • Hence, it is the mid and low tier that have been hit hardest by the decline which has resulted in an increase in Apple’s market share.
• The Chinese data leads me to think that the original estimate put out by TSMC (see here) at its Q1 2020 results that expected a 10% decline in smartphone shipments this year remains about right but may end up somewhat higher.
• RFM expects that the market will fall by 10% – 20% YoY in 2020 but when the economic outlook starts to look a bit better, there will be catch-up growth.
• This is exactly what has happened in the past as when the economic situation deteriorates, users discover that they can use their old phones for longer than they normally would but then immediately upgrade them when times are better.
• With the economic outlook where it is now, I would expect 2021 to be a flattish year and then with a vaccine sometime next year, for the market to recover in 2022 and 2023.
• This does not bode that well for anyone exposed to the market and despite market share gains I struggle to understand Apple’s current valuation at a forward PER of 29.1x.
• The same is pretty much true for the S&P500 which has for several months now has been trading as if the pandemic and its economic impact were nothing but a bad dream.
• I am not sticking around to find out what happens when the sleeper awakes to reality.