Apple Inc. (AAPL), Google Inc (GOOG): Attack of the Mobile Clones

Low-priced smartphones, as low as $70, from Huawei, ZTE and many lesser known Chinese startups are flooding into emerging markets, undercutting mid-market competitors like Lenovo, LG, Motorola and Samsung. History will repeat as consumers buying low-end devices will quickly sour from buyer’s remorse due to inferior quality, reliability and support issues. In due time the stronger mid-market competitors will squeeze out the low-end clones with solid mid-priced devices below $200.

Exaggerated demise

The market for high-end smartphones is still years away from saturation. Growth in mature markets may slow somewhat, but with Q3 iPhone shipments growing by 66% in Japan, and 51% in the US, demand appears to be quite healthy. In emerging markets growth is very strong. iPhone activations in Russia reached record levels in Q3, and iPhone sales also improved in India by 400%, Philippines by 140%, Turkey by 140%, and Poland by 60%, clearly signaling there is still growing demand for premium iPhones. As fall approaches significant product updates are due from Apple, and company executives have been hinting about amazing new products to come later this year. Even if Apple doesn’t introduce a new product category, significant improvements on the iPhone and iPad will continue to drive product refreshes in established markets and new sales in emerging markets, without a cheaper iPhone.

On the other hand, as a leading competitor in multiple markets at multiple price points, Samsung will likely have to compromise margins in exchange for market share, but Samsung isn’t backing away from the premium mobile market either. Spending record sums on marketing and R&D, Samsung forecasted a record total of 24 trillion won in capital expenses this year, over 1 trillion won more than last year. A good chunk of that was spent on new product launches earlier this year, but Samsung told investors it intends to drive demand and protect profit margins by offering differentiated smart phone displays, such as flexible and OLED screens.

The street may be fixated on lower priced smartphones, but the road to profitability and healthy margins is still in the upper end of the market. The low-end road leads to rocky shores littered with the decaying bones of the clones from the last race to the bottom of the commodity technology market.

Invest wisely, my friends.

The article Attack of the Mobile Clones originally appeared on Fool.com and is written by Phil Cutajar.

Phil Cutajar owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Phil is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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