As tensions remain high over ongoing US-China trade negotiations, we recognize all eyes will be on the next development in the tit-for-tat tariff saga. Given the globalized nature of the supply chain, technology products are at the center of this dispute, causing concern among some emerging market investors. Some commentators have suggested US President Donald Trump’s decision to delay an increase in tariffs on some Chinese goods until December was based on a reluctance to see prices increase for mobile phones, laptops and video game consoles in the run-up to the US holiday season. However, US-Chinese tensions are not the only issue facing the technology sector.
Moreover, the deterioration in Korean-Japanese relations over the past year due to historical issues has also led to uncertainty in the technology sector. Japan has tightened rules on exports of three key materials to South Korea’s semiconductor industry.
While the trade spat between Japan and South Korea has yet to have a material near-term impact, it has led to lower visibility for the industry’s medium- to longer-term outlook as the timeline for a resolution between South Korea and Japan is unclear. If the Korea-Japan trade issues were to persist or worsen, crucial smartphone component makers such as Samsung Electronics and Hynix could face both production bottlenecks and challenges moving towards next-generation technology, as it will take time to localize and/or shift the supply change.
Despite this uncertainty, we remain positive on the structural trends in the technology hardware industry and still see pockets of opportunity within the smartphone industry, particularly for companies with strong innovation capabilities and financial characteristics.
Smartphone Manufacturers’ Fight for Innovation Crown
The growth in smartphone sales over the last decade has been phenomenal. By 2016, global smartphone sales had reached nearly 1.5 billion, enough devices for every fifth person in the world.1
Many smartphone manufacturers are preparing to launch devices with fifth-generation (5G) capabilities to tap into new 5G mobile networks that are being rolled out in countries such as South Korea. However, there are signs that the global smartphone market may have reached saturation—smartphone shipments appear to have fallen in the second quarter of 2019.2
While the unit growth of smartphones has slowed down, we expect smartphone manufacturers to continue to spend more per phone on improving select handset features to attract consumers and gain share. That race to enhance consumer value should create investment opportunities among handset component manufacturers.
One area we might see smartphone manufacturing companies looking for differentiation is in the quality of their in-phone cameras. Leading companies have featured an increasing number of cameras, more complex camera designs, as well as higher resolution lens sets in their smartphones.
This demand for continued innovations in the optical space benefits the technological leaders within the smartphone lens space as it allows them to continue to increase not only the volume but also the average selling price. This is because the fast pace of upgrades in the space allows the leaders to continue to maintain and even increase average selling price as the laggards struggle to catch-up to increasingly higher technological and quality requirements.
Trade War Stress Opens Market Share Opportunities
As US-Chinese trade tensions drag on, we see an opportunity for non-Chinese smartphone component competitors to gain a larger market share.
The reason why companies are relocating certain aspects of smartphone production and assembly to countries outside China boils down to rising costs of land, labor and general production of goods in China. The US-China trade war has accelerated this trend.
We’ve seen evidence multinationals are investing in suppliers with the ability to diversify away from the Chinese smartphone market and into low-cost manufacturing centers in Asia. Vietnam and India have been attractive relocation options. Both countries are home to thriving manufacturing industries and we think both stand to benefit as companies invest heavily in factories, equipment and supply chains. An increasing number of firms have set up cutting-edge research and development labs in Vietnam and India, where operational costs are typically lower than in advanced economies.
In India, cumulative foreign direct investment (FDI) inflows came to US$64 billion for the last year.3 Noida, a city on the outskirts of New Delhi, is now home to one of the world’s largest smartphone manufacturing hubs. According to industry estimates, that hub is set to produce 120 million units a year for one company alone.
Vietnam has also captured global attention. FDI investment accumulation came to US$19 billion for 2018.4 The former garment manufacturing hub has moved up the value chain to produce technology-related goods, including smartphone components. And, given the country’s geographical proximity to China, it makes it easier for companies to integrate Vietnam into often complicated smartphone supply chains.
While Vietnam’s prospects look promising, it does currently face some constraints to achieve the production capacity and capability of China. However, we see Vietnam and other smaller economies gaining market share, particularly in certain niche industries.
Tying it All Together
On balance, we believe that select segments of the smartphone industry offer long-term growth potential that could see investment for years to come. In our view, current trade tensions present opportunities for select companies that can navigate and sustain earnings power in an already saturated market.
As long-term investors, we seek to identify companies that we believe are likely to benefit from the structural trends discussed. We look for companies with high-quality management, strong innovation capabilities and robust cash flow generation. In our view, these characteristics will help these companies navigate and potentially gain market share in the more complicated operating environment borne out of the US-China trade war.
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The comments, opinions and analyses presented herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice.
1. Source: International Monetary Fund, “A New Smartphone for Every Fifth Person on Earth: Quantifying the New Tech Cycle,” January 2018.
2. Source: IHS Markit, August 2019.
3. Source: Ministry of Commerce & Industry, July 2019.
4. Source: Vietnam’s Ministry of Planning & Investment, December 2018.
Black Friday, Cyber Monday, shot the lights out
The numbers are in, and it shows that the start of holiday season shopping in South Africa saw spectacular growth
Black Friday and Cyber Monday continues to be a hit in South Africa, with both days exceeding expectations.
“Black Friday did not disappoint,” says Solly Bellingan, head of customer relations at BankservAfrica. “Despite the tougher economy, it seems South Africans took advantage of the days’ special deals with in-store and online transaction volumes reflecting strong year-on-year growth. Both days have certainly made their mark amongst local retailers and shoppers,
South Africans shopped up a storm with the total number of Black Friday transactions processed by BankservAfrica, in-store and online, at 7,077,117 (*) in 2019 – 36% up from 2018’s 5,204,594. This translates into a total spend of R6-billion, an impressive 106% increase on 2018’s R2.9-billion.
When compared to 2018, it seems bargain hunters decided to get the best deals early with a 33% year-on-year increase in sales at midnight. The 12-hour period between 06:00 and 18:00 proved to be busiest, with similar volumes being processed each hour. The highest number of transactions processed in a 60-minute period was between 10:00 and 11:00 at a volume of 595,792.
“3D-Secure, our online card authentication service, i.e. transactions that require a one-time pin(**), showed steady growth this year with a 32% year-on-year increase on Black Friday and transaction volumes reaching a total of 534,828,” says Bellingan. The busiest shopping times were between 09:00 and 10:00 in 2019 compared to the earlier start in 2018 at 08:00 to 09:00.
“The most expensive online transaction recorded on Black Friday was for a hospitality purchase of R10,067,400 by an international company. The most uses by one card was 83. During peak, we processed 717 transactions while the average was 371 per minute for the day.”
Cyber Monday was less active than Black Friday with a 42% growth in online transactions that reached a volume of 249,908 in 2019 (up from 176,595 in 2018). However, in both years, most of the transactions took place between 10:00 and 11:00, with the most expensive being R1,997,800 and 151 uses by one card. The highest average transactions per minute was 322 at peak and 173 per minute for the day.
“This year’s Black Friday and Cyber Monday data mirrors the global data of record-breaking sales – and the BankservAfrica featured figures are only a portion of the entire sales figures for both days,” says Bellingan. “It will be interesting to see if these manage to outpace festive season spend this year.”
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Amazon records biggest ecommerce day ever
Amazon has announced that Cyber Monday was once again the single biggest shopping day in the company’s history, based on the number of items ordered worldwide. Customers all around the world shopped at record levels across a wide selection, with hundreds of millions of products ordered worldwide between Thanksgiving and Cyber Monday, alone. Customers purchased millions more Amazon Devices compared to the same period last year in Amazon’s Stores globally and the best-selling items were Echo Dot and Fire TV Stick 4K with Alexa Voice Remote.
“We’re focused on making this holiday season more convenient than ever for our customers, especially given how short this holiday shopping season will be,” said Jeff Wilke, CEO Worldwide Consumer, Amazon. “We are thrilled that customers continue to come to Amazon in record numbers to discover what they need and want for the holidays. Thank you to our customers and employees all around the world for making this holiday shopping weekend the best yet.”
Holiday Weekend Highlights:
- Customers worldwide purchased more toys this Black Friday and Cyber Monday combined than ever before. Among the tens of millions of toys purchased during this time period, best-sellers included LEGO Star Wars Darth Vader’s Castle, Monopoly Game: Disney Frozen 2 Edition and Hasbro games such as Jenga, Guess Who and Candy Land Kingdom of Sweet Adventures.
- Cyber Monday was the single biggest shopping day for Amazon Fashion worldwide, with more items purchased than any other single day in the company’s history. Best-sellers included Carhartt Men’s Acrylic Watch Hat and Champion Men’s Powerblend Fleece Pullover Hoodie.
- Amazon customers worldwide ordered more than 25 million home items on Black Friday and Cyber Monday, combined.
- Best-sellers on Black Friday in the U.S. included Echo Dot, Fire TV Stick with Alexa Voice Remote, Instant Pot Duo80 – 8 Quart, 23andMe Health + Ancestry Service: Personal Genetic DNA Test, L.O.L. Surprise! Winter Disco Bigger Surprise and iRobot Roomba 675 Robot Vacuum.
- Customers worldwide purchased more than four million beauty products this Cyber Monday compared to last year, with best-sellers including Oral-B Genius Pro 900 Electric Toothbrush, Lagunamoon Essential Oils Top 6 Gift Set and L’Oreal Paris Voluminous Makeup Lash Paradise Mascara.
- Top-selling categories worldwide include Toys, Home, Fashion and Health and Personal Care.
- The best-selling products in Amazon’s Stores on Cyber Monday in the U.S. included Echo Dot, Fire TV Stick with Alexa Voice Remote, Play-Doh Sweet Shoppe Cookie Creations, Keurig K-Cafe Coffee Maker and LEGO City Ambulance Helicopter 60179 Building Kit.
- Independent third-party sellers in Amazon’s Stores — mostly small and medium-sized businesses – sold more items during Cyber Monday 2019 than any other 24-hour period in the company’s history.
- For the third year in a row, Whole Foods Market broke its all-time record of turkeys sold during the Thanksgiving season.
- Amazon delivered millions of grocery items to Prime members in the U.S. through the five days between Thanksgiving and Cyber Monday. Best sellers from Amazon Fresh and Whole Foods Market delivery included Honeycrisp apples, lemons and avocados.
- Top selling items at Amazon Books and Amazon 4-star stores over the holiday weekend included the Amazon Smart Plug, Echo Dot and All-New Echo Dot Smart Speaker with Clock, L.O.L. Surprise! Dolls, Wrecking Ball (Diary of a Wimpy Kid Book 14), and the Wyze Cam 1080p HD Indoor Wireless Smart Home Camera with Night Vision.
Record-Breaking Weekend for Devices
- Shoppers purchased a record number of Amazon Devices globally this holiday weekend.
- Amazon customers worldwide purchased millions more Amazon Devices, compared to the same period last year in Amazon’s Stores globally, including Echo devices, Fire TV devices, Kindle devices, and Fire tablets.
- It was a record-breaking holiday shopping weekend for smart home devices in Amazon’s Stores globally with shoppers purchasing millions of smart home devices, including iRobot Roomba 675 Robot Vacuum, Furbo Dog Camera, and Wemo Mini Smart Plug.
- The best-selling products in Amazon’s Stores globally were Echo Dot and Fire TV Stick 4K with Alexa Voice Remote.