The recovering mobile phone industry chain: focus on improving profits and exploring new opportunities

The mobile phone industry chain in 2023 can be described as ups and downs.

In the first half of the year, due to the inventory backlog caused by consumption less than expected, the industry experienced several quarters of inventory consolidation period. With Huawei's entry into the market in the second half of the year and the industry entering the peak sales season, the superimposed inventory situation is becoming healthy, and the industry is gradually recovering.

The 21st Century Business Herald reporter comprehensively combed the financial reports of the head mobile phone industry chain and found that increasing revenue may not be the core proposition during the year, but increasing profits seems to be the core purpose of manufacturers. In addition, manufacturers are emphasizing the effectiveness of internal management.

Entering 2024, the recovery momentum of the mobile phone industry seems to be clear. According to a recent report released by Counterpoint, China's smartphone sales in the first quarter of 2024 increased by 1.5% year-on-year and 4.6% quarter-on-quarter, marking the second consecutive quarter of positive year-on-year growth. Industry sales are expected to grow in the low single-digit percentage in 2024.

Low growth means that the competitive environment in the industry will remain challenging in 2024. With the return of Huawei, other leading domestic manufacturers tend to compete fiercely in the mid- and low-end price segments, which tests the communication and product definition of the mobile phone industry chain. Of course, for companies in the mobile phone industry chain, exploring new business growth poles outside of mobile phones is also gradually becoming effective.

Steady recovery

A number of practitioners told the 21st Century Business Herald reporter that the mobile phone industry chain has entered a healthy state of inventory since the second half of 2023, and has experienced a certain inventory consolidation process before.

Lin Keyu, a senior analyst at Counterpoint, told the 21st Century Business Herald reporter that the growth of domestic mobile phone sales in the first quarter of this year was partly related to the low sales base of the previous year. "Because in the fourth quarter of 2022, many manufacturers have more products in stock for the mid-to-high-end market, but the pricing is not too aggressive, resulting in many manufacturers at that time (the first quarter of 2023) in the inventory clearance stage. ”

He pointed out that on the whole, the domestic mobile phone market will improve in the fourth quarter of 2023, and 2023 will be a trough in comparison. "So far this year, there are no clear external factors to prevent the market from picking up, and most manufacturers are actively taking actions to improve cost performance for sales, hoping to launch mobile phones with higher configurations than in the past, but entering a better price segment, so as to attract consumers to change their phones. He recalled.

A bigger variable comes from Huawei's regression, which has an impact on the competitive landscape of the industry. According to Counterpoint statistics, Huawei stood out among all mobile phone brands in the first quarter, with sales increasing by 69.7% year-on-year. The reason for this is that the booming sales of its Mate 60 series and the household name of the brand have greatly increased Huawei's market share in the high-end market of more than $600.

Lin Keyu told reporters that because China is not a growth market, Huawei's return in the second half of last year is bound to grab a certain share of other manufacturers, which is already happening.

"Since the fourth quarter of last year, we have noticed that most manufacturers will tend to compete for market share and lower the priority of striving for profits. This is also something that must be done, after all, it is difficult for the high-end market to compete with Huawei. He added that in this process, many manufacturers will choose to use low-end products to strive for a larger market share.

This trend is also reflected in the financial reports of the industrial chain, and the company is also trying to cope with the pressure period in the first half of the year.

According to the financial report of Huaqin Technology, a leading ODM foundry, the operating income in 2023 will be 85.338 billion yuan, a year-on-year decrease of 7.89%, but the net profit attributable to the parent company will be 2.707 billion yuan, a year-on-year decrease of 5.59%.

According to the announcement, the decline in revenue is due to the reduction in the price of a single unit of smart terminals and other products in this period. In terms of expense management, the company has also optimized and improved R&D efficiency.

Changying Precision, the head manufacturer of precision structural parts, has a similar situation. In fiscal year 2023, the company achieved a total operating income of 13.722 billion yuan, a year-on-year decrease of 9.74%, a net profit attributable to shareholders of listed companies of 85.7028 million yuan, a year-on-year increase of 102.23%, and a non-net profit attributable to the parent company of 18.6321 million yuan, a year-on-year increase of 10.26%. The announcement explained that the rapid growth of net profit attributable to the parent company stems from the pressure of weak terminal demand in the first half of the year, and the company closely follows the development trend of the industry and customer demand.

In 2023, affected by the weak downstream demand in the first half of the year, Changying Precision's consumer electronics business (electronic component products) achieved a total revenue of 10.132 billion yuan, a year-on-year decrease of 19.63%, and this business accounted for 73.83% of revenue. The gross profit margin was 20.31%, a year-on-year increase of 2.8 percentage points.

The company pointed out that although the scale of revenue has declined slightly, it has made significant progress on new projects. In the fourth quarter, the XR project of the company's major customer was successfully mass-produced, and at the end of October, the titanium alloy structural parts project of Android customer smartphone was also successfully mass-produced.

Industry linkage

The inventory pressure in 2023 and the pressure of industry share competition in 2024 will also bring new changes to the cooperation tendency of the mobile phone industry chain.

In Lin Keyu's view, Huawei's return is mainly to strive for more high-end market share, and other domestic manufacturers will hope to maintain their existing share or be squeezed as little as possible by launching mobile phone products with higher cost performance, better system tuning, and AI performance enhancement.

This is already reflected in the sales figures. "The data for the first quarter reflects the domestic sales before and after the Spring Festival, and its growth point mainly comes from low-end products. For example, during the Chinese New Year, consumers in lower-tier cities will be attracted to buy entry-level mobile phones. He pointed out that these trends are what make ODM manufacturers profitable. "In fact, in terms of low-end products, ODM foundries will have development advantages, so that the overall profit can be maximized and the volume will be maximized. Therefore, we will see that ODM manufacturers have the opportunity to continue to grow in this market. ”

Counterpoint statistics show that design outsourcing is becoming mainstream. Overall shipments in the global smartphone market fell by 4% in 2023, but the contribution of ODM/IDH to overall smartphone shipments in 2023 edged up to an all-time high as many brands chose to outsource smartphone design and manufacturing to ODMs to remain competitive in a highly competitive market. Brands such as Samsung, Xiaomi, Honor, OPPO, and vivo are outsourcing some of their product lines to ODM/IDH manufacturers.

Huaqin Technology's financial report shows that in the first quarter of 2024, the company achieved operating income of 16.229 billion yuan, down 3.52% year-on-year, net profit attributable to the parent company of 606 million yuan, up 2.59% year-on-year, and non-net profit attributable to the parent company of 530 million yuan, up 43.14% year-on-year. Thanks to the continuous and steady development of the consumer electronics business and the rapid and high-quality growth of the data center business, the company's overall gross profit margin has increased.

For example, Lin Keyu said that around 2022, the proportion of orders entrusted by vivo to ODM foundries will be about 20%, but in 2023, nearly half of its orders will be given to ODM foundries. This is because mobile phone manufacturers do not need to invest additional manpower, production and other costs with the help of ODM foundries, which means cost optimization for the whole machine factory itself.

"Mobile phone manufacturers are competing for sales, and the easier path is to compete for the low-end market. Choosing an ODM manufacturer is a more suitable route. He pointed out that the logic lies in the fact that foundries often undertake the production needs of multiple machine manufacturers for models close to the price range, and it is relatively easy to achieve cost control and profit maximization with a larger scale.

Lin Keyu continued, of course, ODM manufacturers have squeezed profits to the extreme, so it will not further compress the profit margins of ODM manufacturers themselves.

The new challenge is that supply chain costs are rising. Previously, a senior executive of a mobile phone manufacturer bluntly told reporters that although it has been known through the supply chain that the price of components will rise this year, the current increase is still beyond expectations, especially memory.

To a certain extent, this has led to a closer linkage between domestic industrial chain companies. In the release of mid-range mobile phones since last year, many complete machine companies have clearly mentioned joint tuning with domestic supply chains (such as screen factories and motor factories). Close cooperation on the dilution of costs and the formation of a R&D risk sharing mechanism can bring certain improvements to the upward pressure on components.

Previously, insiders of domestic screen manufacturers told the 21st Century Business Herald reporter that more and more domestic screen manufacturers began to supply domestic mid-to-high-end flagship mobile phones, on the one hand, the reason is that the technology continues to mature, and domestic manufacturers are still promoting cost reduction and other actions;

A recent report by CINNO Research, a research agency, also pointed out that in the first quarter of 2024, the share of global AMOLED smartphone panel shipments by region narrowed to 46.6% in South Korea, and the share of domestic manufacturers accounted for 53.4%, an increase of 15.6 percentage points year-on-year and 8.5 percentage points month-on-month, and the share exceeded 50% for the first time.

Among them, Samsung Display (SDC) AMOLED smartphone panel shipments increased by 11.1% year-on-year, and the share fell to only 40%, its dependence on Apple and Samsung mobile phones is getting deeper and deeper, and orders from other domestic Android brands continue to transfer out.

Walks on multiple legs

In the development of the mobile phone industry for many years, the "second curve" business has gradually become a proposition for industry chain manufacturers to think about a few years ago. At present, in the performance of leading manufacturers, the business other than mobile phones is gradually becoming a revenue support.

For example, for Huaqin Technology, the business that contributes the most to its revenue is no longer mobile phones, but high-performance computing.

According to the 2023 financial report, the company's shipments of AIoT and other products, automotive and industrial products increased during the year compared to the previous year. Among them, high-performance computing revenue accounted for 59.28%, with a year-on-year increase of 1.96%, but the gross profit margin was low at 9.41%, an increase of 1.25 percentage points year-on-year, and the revenue of intelligent terminals accounted for 37.77%, ranking second, with a year-on-year decrease of 22.95%, and a gross profit margin of 12.3%, an increase of 1.17 percentage points year-on-year.

The largest growth rate of revenue for Huaqin Technology was AIoT and others, with a year-on-year increase of 466.53% and a gross profit margin of 20.19%, a year-on-year decrease of 5.27 percentage points, while the revenue of automobiles and industrial products was 817 million yuan, with a growth rate of 37.57%, but the contribution to the overall group was very small, with a gross profit margin of 18.33%, an increase of 7.11 percentage points year-on-year.

In the announcement, Huaqin Technology pointed out the reason why the mobile phone industry chain can "spill over" its capabilities: the company has migrated the technology and suppliers accumulated in the smartphone field to the laptop business, and the R&D efficiency has been improved to the leading position in the industry. In the field of automotive electronics, the ODM model has a high degree of fit with the current needs of the intelligent vehicle industry chain, from the selection of parts in product design, to the large-scale advantage in production, and then to the refined supply chain management, ODM has great advantages in cost control. As a result, the company has laid out four major directions in this field: cockpit, vehicle control, intelligent driving, and networking.

Changying Precision's financial report also shows that in 2023, the company's new energy business will achieve revenue (new energy product components) of 3.54 billion yuan, a year-on-year increase of 43.46%, accounting for 25.8% of the company's overall revenue. The gross profit margin was 18.57%, a year-on-year increase of 1.55 percentage points.

For the mobile phone business itself, moving higher in the value chain is also a necessary proposition.

Counterpoint believes that competition among ODM vendors is shifting from the mid-range market to the high-end market, and as 5G penetration will further increase, ODM manufacturers will play an important role in bringing the price of 5G smartphones below $100.

Lin Keyu told reporters that due to the difference between the supply chain and the low-end of high-end products, if it is taken into account, it will involve high supply chain maintenance costs, so the supply chain system of ODM manufacturers will be focused, and the whole machine factory will tend to match it when choosing ODM manufacturers.

For example, when vivo makes efforts to develop high-end mobile phones, it will not focus on covering the supply chain of low-end models, so it will be handed over to ODM manufacturers to cover and complete production; in terms of high-end mobile phone products, the whole machine factory hopes to have personalized design, but the product differentiation of ODM manufacturers is not large, so the high-end mobile phones are mainly designed and produced by the whole machine factory.

Therefore, it is not that ODM manufacturers do not want to accept orders for mid-to-high-end mobile phones from complete machine manufacturers. On the one hand, the supply chain system may not be reached, and on the other hand, the whole machine factory may not release such orders. He added that as the high-end process of China's mobile phones continues, the current ODM foundry to undertake orders, the cost is about 150 US dollars, and now it is hoping to sprint to the direction of 300 US dollars. In the future, more mid-range products are expected to be produced by ODM manufacturers.

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