In many prior Supply Chain Matters commentaries related to high tech and consumer electronics, we have discussed the pros and cons of a supply chain strategy that supports two different business models. Each has a different purpose and supports a different market environment.
One involves a product and supply chain strategy that supports a cost-affordable price for hardware, with the expectation that additional profitability can be garnered through the sale of related content, applications and services. The other model is to harvest profitability from both hardware and service sales. These models particularly apply to smartphone producers, but apply to other products, especially in the light of evolving Internet of Things (IoT) driven devices.
The Wall Street Journal recently published (paid subscription required) a report on smartphone producers in China, where Xiaomi remains a market leader, which continues to sell a high-end, feature-rich phone at what is described as rock-bottom prices of roughly $280. Now other producers, including Lenovo, Huawei and ZTE have launched rivals to Xiaomi. The article cites 209 million unit sales across China in the first-half of this year compared with 75 million in the U.S. Thus, market scale and volume are considerable incentives.
Then there is Apple, which reportedly sold 26 million iPhones during this same period, 5 million less than that of Xiaomi. As we probably know, Apple fosters the latter strategy of harvesting profitability from both hardware and follow-on platform driven sales. It is therefore no surprise that Apple in now often referred to as a profitability machine. With growing profitability and cash, it can invest in more product innovation, longer-term supply agreements and all forms of supply chain agility.
But, the WSJ points out that the smartphone market across China, the largest in the world, has stopped growing. Once more, the U.S. market has by many accounts reached saturation with phone upgrades and/or replacements primarily driving product demand. Existing producers within China are now in a battle for market-share dominance, which remains driven for the most part by price, followed by functionality.
Today, Apple held its annual super hyped product event. The company announced its new iPhone 6 line-up, which includes a new aluminum case, 3D Touch system and an upgraded camera. The event was jubilant and CEO Tim Cook declared the launch of: “the most advanced smartphone in the world.”
But yet, the new battle ground of growth remains China and other emerging economies where consumer discretionary spending has far different characteristics and behaviors.
As to which of these strategies prevail as successful will be the subject of many commentaries and reports to come. However, one important tenet is that product and supply chain strategy will play a crucial role in long-term business outcomes.