China's dream of leading smartphone market takes a hit from chip shortage

The low-cost, high-volume strategy that helped Chinese smartphone makers challenge Samsung Electronics is beginning to falter as the AI boom drives up memory prices and forces companies to slash shipment targets.

Chinese firms, including Xiaomi, recently informed parts suppliers that they would cut their shipment targets for this year by as much as 30 percent, according to foreign media reports including Nikkei Asia on Wednesday.

Xiaomi founder and CEO Lei Jun said in 2021 that the company would become the world's largest smartphone maker within three years. However, this year's shipment target has been cut from an initial target of 110 million units to 95 million, a 44 percent drop from the 170 million units the previous year, citing component shortages and rising production costs.

Oppo and Vivo have also lowered their projected shipments to under 90 million units.

Honor, a smartphone brand spun off from Huawei that posted a company record 71 million smartphones shipped last year, is also expected to struggle to maintain its growth. Meizu, another Chinese smartphone maker, canceled the launch of its Meizu 22 Air smartphone in January, saying at the time that surging memory prices became a major obstacle to its smartphone business plans.

The Chinese government has supported domestic demand through generous trade-in subsidies encouraging consumers to replace older products with new ones. Despite those measures, the rapid expansion of Chinese smartphone makers has been undermined by the AI boom.

Global semiconductor manufacturers have shifted production capacity toward high bandwidth memory chips and high-value dynamic random-access memory, or DRAM, for AI servers. As a result, supplies of key commodity components used in smartphones, including DRAM, NAND flash memory and printed circuit boards, have tightened.

The supply shortage sent component prices soaring and has dealt a particularly heavy blow to Chinese manufacturers that rely on low-price, high-volume sales strategies. Because buyers of budget and midrange smartphones are highly price-sensitive, manufacturers have found it difficult to pass higher production costs on to consumers.

As margins have narrowed to the point where selling more devices can lead to greater losses, some companies have opted to cut shipments.

The impact is spreading across the global smartphone market.

Global smartphone shipments are expected to fall by about 14 percent this year, marking the steepest annual decline on record, according to market tracker Counterpoint Research. Apple and Samsung Electronics, which have a larger share of the premium smartphone market than their Chinese rivals, are also expected to face weaker demand and rising manufacturing costs.

Samsung's Mobile eXperience Division, in charge of the smartphone business, has also been affected by soaring memory prices.

Although Samsung posted a preliminary operating profit of 89.4 trillion won ($59 billion) in the second quarter, analysts estimate that the smartphone division's operating profit will range from 400 to 800 billion won, putting it on track to log an on-year decline of 74 percent to 87 percent from the 3.1 trillion won posted in the April-to-June period last year.

Hyundai Motor Securities forecast the division's operating margin to fall to negative 6 percent this year because of weaker profitability caused by higher production costs.

"The era when major smartphone makers such as Apple could dominate the memory market through their pricing power is over," an industry source said. "Smartphone makers with weaker finances and less secure supply chains will find it increasingly difficult to absorb rising costs, widening the gap between companies."

BY KIM SU-MIN [[email protected]]