Investors following the telecom industry might want to go bargain-hunting — for the stocks of smartphones designed with lower-end prices in mind and the companies that make them what they are.
That’s where the growth potential is in emerging markets, and that’s the market phone manufacturers are seeking out. This is specifically true for China and India, where a vast untapped market will gain phone access to the Internet for the first time. That market also beckons chipmakers as well as software and social media companies, all of whom stand to benefit from broader use of smartphones.
As a growing middle class moves up to smartphones, makers are racing to capture their patronage. Phones priced under $100 have seen sales more than triple from 2012 to 2013, and phones at half that price or less have soared from less than a million in 2012 to nearly 20 million last year. Some companies eager to take advantage of such a burgeoning market are stripping down phones, sacrificing features for price, while others are determined to cut price while finding ways to keep the bells and whistles that lure buyers.
Canada’s BlackBerry went down that road in December, making a deal with Foxconn to design and market the former’s low-end smartphones in Indonesia, another underpenetrated market. Nokia, despite its impending ownership by Microsoft, has resorted to using Google’s Android software to wade into the low end of the smartphone pool with its Nokia X, priced at 89 euros ($120).
South Korea’s LG has announced plans to double its market share in smartphones by broadening the range of its products, adding lower-priced models to appeal to a broader audience, and Mozilla is probably the most ambitious pricewise, showing off a prototype for a smartphone that will sell for $25. While that is definitely the low end of the price spectrum and offers only very basic features, the company, mostly known for its Firefox browser, has also brought out higher-end models. Mozilla is working with budget chipmaker Spreadtrum on the $25 model, while the more expensive phones will come from such makers as Huawei and and ZTE.
BlackBerry may be getting into the lower-end smartphone market in Indonesia, but its messaging is in for a challenge as South Korea is pushing its own messaging apps in Indonesia’s very active social media market. Kakao Corp. has enlisted pop stars as marketing aids, and is offering unlimited KakaoTalk data through the Indonesian carrier Telkomsel. And Samsung is moving in as well, with a partnership with South Korea’s Naver Corp unit Line Corp. Samsung’s Galaxy line of smartphones has Line preinstalled. Nokia, too, is getting into the act, planning on including Line on its low-end smartphones.
Brian Colello, equity analyst with Morningstar, said that the smartphone market “is still poised to see strong growth over the next five years as customers trade up from basic flip phones worldwide.” There are about 10 prominent Chinese handset makers, he said, who are out to capture as much of their domestic market as possible, while “other firms in the midrange, [such as] Samsung, LG and HTC, are all focused on China as well.”
And it’s not just handset makers who stand to benefit, said Colello. “With the rise of the low-end market, beneficiaries tend to be Asian chipmakers, and certainly Asian software and social media companies.”
Asian companies may also find it an easier road, since some of the challenges facing companies looking to expand into China are political rather than technical. Colello said, “In China, the operating system is still Android, but the services layered on top are maybe from Baidu, or apps from companies such as Tencent; those are the social media players there.”
Censorship issues in China mean that a number of Android apps including the Google search bar, apps for Gmail, and even Google maps are not welcome. “There are various political issues at points in the supply chain in the entire platform. Hardware, not as much. The large handset makers have relationships to sell into China; the hardware side is okay. There are always privacy and censorship concerns about the Internet in general, and that extends to what’s on a phone.”
There is the potential for other roadblocks as well, such as license fees for patents held on wireless technologies. Colello said that Qualcomm is being investigated for charging too much on patent royalties. “Governments from time to time look into licensing terms, competition, antitrust concerns. That’s not just China, and it happens worldwide, where all these companies operate. There’s a political aspect to the entire telecom supply chain, from wireless carriers and equipment makers to phone makers, chip makers and the software on devices.”
While investors will have to keep an eye on the political and legal aspects of companies’ expansions—after all, Qualcomm already has a black eye on labor issues because of its treatment of workers in its Apple factories—the opportunity is substantial.