Smartisan Is Three Generations In and Its Chances Keep Shrinking — 11 Changes in the Smartphone Industry Behind That

The smartphone industry looks nothing like the one Luo Yonghao walked into when he started making phones.

A little after 7:30 last night, Smartisan Technology CEO Luo Yonghao stood on stage to launch a new phone for the fifth time.

As always, the two-hour-plus event mixed product demos, two-man crosstalk comedy, and Luo Yonghao's catchphrase: "Did you get that?"

Tens of thousands of fans came from all over the country. Online, video sites including iQiyi, Youku, and Bilibili drew roughly a million people to the livestream.

Luo Yonghao announced he was going into the phone business in 2012. That year Xiaomi had just launched its second-generation phone and was still a small startup.

In the four years since, Luo Yonghao has been through a lot: he built a custom Android ROM, launched the T1 at a thousand yuan more than Xiaomi's phone, spent most of a year fixing production problems, won a design award, admitted that in over a year he had sold only 250,000 T1s, released the thousand-yuan-class Nut phone, sold a pile of 69-yuan "idealism" back covers, watched his contract manufacturer go bankrupt, launched the T2 with no power button, and was said to be preparing to sell the company to LeEco.

Seen from the front, the two new phones shown yesterday look more like the iPhone, and the hardware specs on the official site now use the kind of industry copy Smartisan used to mock, such as "full-power Qualcomm Snapdragon 821."

Smartisan's care about product details has carried over. In the new system, for example, you can select text and have it split into words according to the meaning of the passage, which makes it easier to grab exactly the words you want. That is especially handy in WeChat — as before, Smartisan spent a lot of effort to fix one annoying small thing. Another example: you can assign one finger so that resting it on the Home button brings up your WeChat or Alipay payment code.

There have been plenty of small touches like these since 2014, but according to financial figures disclosed by an investor, Smartisan may not have far left to go as an independent company.

Smartisan lost 460 million yuan in 2015. In the first half of 2016 it lost 193 million yuan.

In the first six months of this year alone, Smartisan Technology's total assets shrank by two-thirds, from 825 million yuan at the end of last year to 296 million yuan on June 30.

The Nut phone, which fell as low as 599 yuan, the T2, far more polished than the T1, an operating system that got better with each version — none of it saved the company's finances.

Smartisan is not the only one in trouble. Xiaomi, whose phone sales briefly ranked third in the world in 2014 and which was once valued at as much as US$46 billion, has also run out of growth, passed one after another by Huawei, OPPO, and vivo.

Plenty of less famous internet phone brands have already died quietly. What has changed in the smartphone market?

The "internet phone" wave Xiaomi set off is over

Compared with most internet phone brands, Smartisan's finances are actually the good ones

In 2013, when Luo Yonghao showed off a phone ROM that was still unfinished, internet phone brands were at the peak of their popularity.

Xiaomi, which sold 18 million phones that year, was riding high. It used e-commerce pre-orders to calculate production volumes precisely, skipped carrier channels, and worked Weibo and WeChat to turn topics into trends — all of it became the template new phone brands copied.

But over the past year those imitators have shut down or moved on to something else.

• In January 2015, the "100%" phone brand was reported to have folded.
• In October 2015, Dakele founder Ding Xiuhong left the company, and parent Yunchen Technology faced bankruptcy liquidation.
• In September 2016, Xiaolajiao, silent for a year, turned into six new companies after a funding round, switching to P2P lending, VR, and investment.

Beyond those there were countless no-name outfits like Dami and Nichai, all of them trying to copy Xiaomi's model and beat Xiaomi at it. None of them makes a sound now.

It is not only these small startups. The internet phone sub-brands set up by traditional handset makers are mostly not doing well either, apart from Huawei's Honor:

Among the internet phone brands that once had their moment, only Huawei's Honor has done well; the rest have not.

Last September, Coolpad Dashen was bought by 360. The biggest news about Lenovo's Lemon brand since it launched the Lemon 3 in January this year was the departure of its product planner, Deng Xu. OnePlus, which sold purely through internet channels, has been closing offline stores this year and has even started layoffs. IUNI, backed by Gionee, went through three CEOs in three years, and since July its site no longer sells phones at all, leaving only an after-sales phone number.

Nubia, still active in the market, has also stopped stressing that it is an internet phone brand. At the launch of the Prague S in January this year, it announced that its online-to-offline sales split would reach 5:5 this year.

Xiaomi, the model they copied, is struggling too

According to IDC, Xiaomi and Lenovo were pushed out of the global top five in shipments in both the first and second quarters this year, and their share of the Chinese market has fallen from 16% in the second quarter of last year to 9% now.

In the second quarter of this year, Xiaomi's smartphone shipments fell for the first time ever, to 10.5 million units, down 38% year on year.

According to the app analytics platform Umeng, the most active Android phones today are mostly phones released three or four years ago, or thousand-yuan budget models.

The three most active Xiaomi phones are the Redmi 1S, released in early 2014, the Mi 4, released in July 2014, and the Mi 2S, released in 2012. Not one of the dozen-plus new products Xiaomi has launched in the past two years is among the 30 most active Android devices.

Phone sales are splitting toward the two ends

The 1,500-to-2,000-yuan range that internet brands loved most is not as popular now either.

Dixintong, a brick-and-mortar phone retailer active in tier-one to tier-three cities, recently published its phone sales figures for the third quarter of this year. The 500-to-1,000-yuan and 2,000-to-2,500-yuan bands were where most buyers shopped, and the best sellers in those bands were the OPPO R9, the vivo X7, and Huawei's P9.

The phone makers still growing all have strong offline channels

OPPO and vivo grew shipments fastest this year. In the first quarter OPPO sold 18.5 million phones, up 153% from a year earlier, taking Lenovo's place as the world's fourth-largest phone maker, behind Samsung, Apple, and Huawei.

According to OPPO chief marketing officer Liu Lei, online channels such as Tmall and JD.com account for less than 5% of the company's sales; 95% of its phones are sold offline.

Over the past two years, while other makers were trying to sell phones online, OPPO and vivo were putting up stores across China. The two companies now have 200,000 physical stores in the country, reaching cities from tier three down to tier six.

Saturation in tier-one and tier-two cities is the main reason

Nearly everyone in China who is online already has a smartphone

According to CNNIC, by June this year China had 656 million mobile internet users, 92.5% of all internet users in the country — a figure that has barely moved in a year.

In other words, almost everyone in China who has ever been online is already using a smartphone.

At a rate of one new smartphone every two to three years per person, China's smartphone market can never again hold the double-digit growth it had in 2013 and 2014.

People are also replacing their phones less often

As the smartphone matures as a product, users around the world have less reason to buy a new one.

Figures from Citigroup show that by April 2016 the replacement cycle had stretched from 28 months to 29 months. A year earlier it was 24 to 26 months.

China looks much the same.

According to the app data platform Umeng, in September 2014, the month the iPhone 6 series went on sale, the smaller iPhone 6 alone accounted for 0.2% of all iPhone users in China.

In September 2015, after the iPhone 6s came out, the two models together accounted for 0.4%.

This year's iPhone 7 series: by the end of September each of the two models was above 0.1%.

The people without smartphones have barely touched the internet at all

Another important number comes from the research firm Pew. As of February this year, only 58% of China's 1.374 billion people had a smartphone. Of the 573 million who did not, subtracting the roughly 16.6% under the age of 15 leaves a remaining smartphone market of 477 million people.

But those 477 million people still barely touch the internet. They will not see last night's Smartisan launch, or the marketing on Weibo and WeChat. OPPO, vivo, and Huawei, which are digging into this market, do it through offline stores.

The phones themselves have little room left for a breakthrough

Android keeps getting more complete, and most phones already have the features that matter

Back in 2011, stock Android was a poor experience with limited features. Xiaomi's MIUI, which made the interface look more like the iPhone and promised an update every week, successfully captured the users who wanted to switch to a smartphone at the time.

But building a ROM to pull in enough users is no longer plausible today, with Android itself so much more complete.

Weekly updates, Xiaomi-style, are now the industry standard. New Android features — blocking preinstalled app bundles, split-screen multitasking, automatic beauty filters, app cloning — get folded into the system almost as soon as they appear.

Without core technology, hardware is hard to differentiate

Almost every smartphone today can be summed up in one line: a flat slab with a big screen. Smartphone design has not changed in any major way since the iPhone made this shape common.

By the end, what the launch event discussed came down to details like whether the metal mid-frame had a visible seam and whether the adhesive floated. Not many people care about that.

Internet phone brands with no core technology of their own have few choices for any component: for key parts — processors, screens, cameras, fingerprint sensors — there are only two or three suppliers to pick from for each.

Take processors. The Android phones released this year — Lenovo's Zuk Z2 Pro, the Nubia Z11, the OnePlus 3, and the Mi 5 — all use Qualcomm's Snapdragon 820.

Mid-range and low-end smartphones mostly use MediaTek chips instead. The whole market is either Qualcomm or MediaTek.

The features that are genuinely different — Samsung's curved screens, Apple's image enhancement and Bluetooth accessories — are new technologies those companies developed themselves. Few companies can do that.

Beyond selling phones, the other ways they thought of to make money do not make money either

Cheap thousand-yuan phones have not made money from software services

Xiaomi co-founder Lin Bin once said that selling a user a phone is only the start of the business: "Start with the open-source Android operating system, get the user experience right, and once users accept the OS, make phones, sell the product through an e-commerce model, and in the end make money from software and internet services."

As of July this year, the Redmi line had passed 100 million units sold, and MIUI had more than 200 million activated users. The Mi app store inside MIUI had already passed 50 billion app downloads last year.

The numbers are that big, and they still have not made much money. According to figures Reuters published this year, Xiaomi's total 2015 revenue was US$12.5 billion, the vast majority of it from selling phones; services revenue was only US$564 million, 40% below Xiaomi's internal target of US$1 billion.

Phone hardware also missed its sales target in 2015, but by less than 20%.

Selling outside China has been harder than the phone makers expected, too

From 2014 on, Chinese phone makers of every size were talking about overseas markets, with India as the first stop. Xiaomi, Lenovo, Meizu, OnePlus, Gionee, Huawei, OPPO — basically every brand you can think of went.

Take India. In March this year the Modi government announced a 29.44% import duty on four categories of equipment including batteries and chargers, aiming for zero imports of electronics by 2020.

To sell phones in India, building a joint-venture plant became the only option — partnering with contract manufacturers like Foxconn and Flextronics. After three years of talk about entering India, the work only began this year, and a return is further off still. In the end it became an investment only a few phone companies of real scale could carry.

Places other than India have not been easy either. In May this year Xiaomi, which had wanted to sell phones in Brazil, left the market less than a year after entering it, and Huawei pulled out of Brazil as well — again because of the local government's heavy taxes on foreign companies.

Last September, Luo Yonghao also announced on Weibo that he would set up a company in Japan and move into the U.S. market. Nothing more was heard about either.

The time when slightly better software and a bit of online noise were enough to run a phone business is over.