Two of the leading Chinese mobile phone distributors, isidi and TELLING, saw sharp declines in their profits during 2014, according to their pre-announcements of annual earnings. TELLING expects to report a net loss of RMB323-357 million (US$52-58 million) despite turning a profit the previous year. isidi estimates its profit for 2014 was down by 97-99%.

TELLING attributed the decline to four main causes:

  1. The market shares of several formerly-mainstream mobile phone brands TELLING re-sells shrank markedly.
  2. The company failed to achieve sales goals for its new phone brands.
  3. After the government awarded 4G licenses in mid-2014, mobile phone brands began to sell off their inventories of 3G phones, which negatively affected TELLING’s gross margin.
  4. Newly created mobile internet and MVNO (mobile virtual network operator) services have not generated any revenues.

The first two reflect the fact that the structure of China’s mobile phone market has changed dramatically in recent years. The four-year-old mobile device maker Xiaomi surpassed Samsung to become #1 in terms of smartphone unit shipments in the Chinese market in the fourth quarter of 2014, according to a report by Strategy Analytics.

But Xiaomi does not sell phones through traditional distributors such as TELLING and isidi. Its business strategy is to selling its phones. It believes this effectively cuts the distribution costs incurred by traditional distribution methods. Online sales now account for about 70% of Xiaomi’s total, according to the company. Market research firm Sino Market Research estimates the rate couldn’t be so high that in 2012, 2013 and 2014 it was 66%, 58% and 57%, respectively.

Thanks to Xiaomi’s success, almost all new smartphone brands to emerge in China over the past few years, such as OnePlus and Smartisan, use the internet as their primary selling platform. Some older brands have joined the trend too, either through their own online stores or third-party marketplaces like Alibaba’s Tmall.

Another major change is that mobile profit margins have fallen sharply, so that distributors can only get a very small cut. This is also largely thanks to Xiaomi. The company made it clear that its low pricing strategy was to acquire more users who would be then be using its software services. The custom Android system developed by Xiaomi has been generating revenues from paid apps/in-app items, paid themes, and advertising, amongst other sources.

Another reason, which TELLING didn’t mention, is that the Chinese telcos stopped subsidising distributors who were selling customized phones for them in 2014.

Image credit: Shutterstock

 

Editing by Mike Cormack (@bucketoftongues)