Chinese Smartphone Industry Five Force Analysis

By | February 8, 2013

The threat of entry (High level)

The threat of entry in the smart phone market in China is strong for several key factors: Firstly, about the economies of scale, the scale economies in production, R&D (research and development), marketing and finance is not large enough to be key barriers to entry in the smart phone market. Also, many existing feature phone and voice phone manufacturers who have similar industrial background with the needed functional scale economies would not meet too much difficulties in term of the economies of scale. Secondly, the product differentiation is large enough to provide a niche market for new player to operate in. Based on different hand phone feature, such as pricing, size of screen, with or without key board, operating system and so on, the product differentiation level is high in the smart phone industry; thirdly, the policies made by the Chinese government support the entry into the IT industry which includes the smart phone market. The smart phone market is categorized in the new generation information technology; fourthly, access to the distribution channel is not difficult. Besides that many exiting companies have already their own distribution channel, new competitors could use new business mode such as E-commerce and direct sale to get them established in the market without too much reliance on the existing distribution channel.

With the growing of the smart phone market, there will be more competitors entering into the industry which is in accordance with the features of an industry that is in the growth stage of the industrial life cycle which relates to different stages an industry will go through, from the first product entry to its eventual decline like a human life. As the smart phone market is in a fast growing stage, the fair margins and differentiated products will attract more new entrants into the industry.

The bargaining power of suppliers (middle level)

The bargaining power of the suppliers in the smart mobile phone industry in China is in a middle level based on the following analysis. First of all, regarding the number of the suppliers in the China mobile phone parts supplying market is large and also for one single mobile phone component, the supplier are a lot in different size and compared to the most smart phone manufacturers, the suppliers are in a smaller size which reduced their bargaining power. Secondly, because many of the mobile phone parts are made according to the industrial standard which means that switching cost from one supplier to another could be very low irrespective of the contract limitations. And low switching cost together with the large number of suppliers enable the mobile phone manufacturers to have more bargaining power while suppressing that of the suppliers. Fourthly, the supplier market which supplies the mobile phone production varies by different components of the part, for example, the largest screen supplier of the Apple iPhone is Sam sung because of the good quality and reputation of the Sam sung screen products, such few supplier phenomenon could also be found in other key parts of smart phone such as the CPU (the smart phone chip) and the RAM (for storage use) which are controlled by a few large MNCs (multinational corporations).

The threat of substitutes (low level) 

Here we discuss one major possible substitute for the popular smart phone which also appeared as the substitute of the voice phone and feature phones: the tablet computer. A tablet computer, or simply tablet, is a complete mobile computer, larger than a mobile phone or personal digital assistant, integrated into a flat touch screen and primarily operated by touching the screen. It often uses an on screen virtual keyboard, a passive stylus pen, or a digital pen, rather than a physical keyboard (Gookin 2010). Besides the differences in the design of the product, the most obvious difference between these two products is that the tablet would not have the voice call functions. Hence, the key factor deciding whether a tablet could successfully substitute the smart phone is that the voice call and traditional text message functions would be out of use by the customers. But the removal of the voice call and traditional text message functions from a mobile phone actually would need the entire user or at least the majority of the users to have a 3G Internet access which allow them to communicate without these two traditional functions. But this seems to be impossible considering the only about 10% penetration of the smart phone users and also even when a customer has a smart phone, it does not necessarily means that he or she will be connect to the Internet all the time. Therefore the substitute effect of the tablet seems to be minimal.

The competitive rivalry (high level) 

Competitive rivalry is the ongoing set of competitive actions and competitive responses that occur among firms as they maneuver for an advantageous market position. According to Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson (2011, p.130), it is of significant importance for tho leading organizations to understand competitive rivalry because the competitive rivalry influences an individual firm’s ability to gain and sustain competitive advantages. The Chinese market is like the global mobile phone market, it is full of world leading mobile phones leaders such as HTC, Sony Errison, and Motorola together with the local mobile phone manufacturers such as ZTE, Dopod, Huawei, Konka and Oppo and so on. One factor that drives up the competition between the established players is the monopoly of telecommunication industry. And the monopoly of the telecommunication industry will enable these service providers to have more bargaining power and at the same time drive up the competition among the established competitors to compete for the chance to cooperate with the huge telecommunication service providers (SPs).

The bargaining power of buyers (low to middle level) 

The power of buyers is the extent to which buyers of the products or service in an industry have the ability to influence the suppliers (Griffin 2011, p.81). The buyer power is one of the two horizontal forces that influence the appropriation of the value created by an industry. According to Robert J. Chapman (2006), there are a number of factors which increase the power of buyers: (1) Buyers are large compared with the supplying industry; (2) In business-to-business markets where buyers produce the product in-house, extending their value chain backwards; (3) Buyers can switch suppliers with minimal cost impact. There are the extent to which products can be differentiated will have a direct impact on prices. While the market of smartphone is not in a business to business style, we will check the other two factors in determining the bargaining power of the suppliers. In term of the size of the buyers, as the smartphone products target mainly at the individual consumers in the market rather than the business users, and because individually they are in smaller size compared to with the supplying industry they would not be given very strong bargaining power to bring down the market price immediately. But the individual customers could gain their power by choosing not to buy the smartphone and or instead choose another supplier. Still we range it as in the low to middle level in total.

To conclude the results of the industrial competitive environment, the overall environment should be considered as with a medium competition level. And taking into the consideration of a rapid growing market and the strong demand as found out by our survey, it would be a good news for business and marketing expansion in the smart phone industry especially when there is an average sound profit margin which is a typical feature of a market which is in the growth stage of the industrial life cycle.

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