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Digitimes Research: China smartphone vendors turning to retail and online channels for better profits
Anthony Chen, DIGITIMES Research, Taipei [Tuesday 2 September 2014]

Because telecom carriers in China have sharply reduced subsidies to smartphone purchasing, China-based smartphone vendors, which used to cooperate tightly with telecom carriers and adopted a strategy of flooding the market with multiple smartphone models, are turning to marketing through retail and online channels, significantly reducing the number of smartphone models customized specifically for telecom carriers, according to Digitimes Research's recent findings.

Digitimes Research expects Huawei, Lenovo, CoolPad and ZTE, the four major China-based smartphone players, to see the telecoms account for less than 50% of their overall shipment volumes in 2014.

Since June 2014, China has adopted a new taxation policy for the telecom industry. Depending on services provided, carriers are required to pay an 11% tax for basic telecommunication services, plus a 6% tax for value-added services, higher than a combined 3% business tax they had to pay for all services. The policy change caused telecom carriers to suffer 20-30% of operation profit drops.

China telecom carriers used to offer consumers free handsets if they pre-paid their fees. But under the new taxation policy, carriers are no longer able evade value-added taxes by designating such free handsets as gifts to customers. Many of the carriers' plans now instead offer free talk time for customers who purchase handsets.

In addition, China's state-owned Assets Supervision and Administration Commission of the State Council in early July demanded telecom carriers reduce their marketing budgets by 20% for three years and the carriers' budgets for handset subsidies are expected to shrink as a result and the numbers of models receiving subsidies will be greatly reduced.

In the past, users' strong demand for changing to 3G handset models and carriers' aggressive subsidies for new handset purchases resulted in Huawei, Lenovo, CoolPad and ZTE supplying 70% of their handsets to telecom carriers.

However, following the telecom carriers' reductions in subsidies for entry-level handset models in May 2013, which caused a subsenquent pile-up, harsh payment terms and slim profits have been reducing smartphone vendors' willingness to cooperate with telecom carriers in China.

China-based smartphone vendors Gionee, BBK and Oppo are mainly focusing on the retail channel in order to see stable growth in their sales and profits. On the other hand, Xiaomi is expanding its smartphone business through the online sales, creating a popular business model that has sent other vendors following suit by their phones online.

Digitimes Research expects China handset players' combined sales through retail and online channels to account for over 50% of China's handset shipments in the second half of 2014. However, as the market is approaching saturation, and products only have limited differentiation, China's handset market is expected to continue seeing fierce price competition and declining profits.

This article is an excerpt from a Digitimes Research Quarterly Data Report (China smartphone market and industry – 3Q 2014). Visit our latest Data reports.

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