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Smartphones: Moving Beyond the Latest and Greatest

By: AccuVal Associates, Inc.

The first mobile phone was introduced commercially in 1983, allowing users to place phone calls utilizing radio links. Nine years later, built on a mobile computing platform, the first smartphone was introduced. Fast forward to present day: Smartphones help consumers send emails and texts, surf the web, take pictures and videos, complete voice-recognition tasks, track directions with GPS, and of course, make phone calls. Not surprisingly, smartphone sales outpaced PC sales in 2011 with an estimated 487 million units for smartphones versus 417 million units for PCs. Smartphones comprised 31 percent of mobile device sales in 2011, according to research firm Gartner.

SUPPLY

Design and manufacturing complicating the process

Smartphone manufacturers employ teams of designers (both hardware and software) to develop concepts for new devices, including internal and external components. Once approved, suppliers are selected and contracts are executed to supply parts to the smartphone assembler.

Smartphones are manufactured and assembled as quickly and efficiently as possible. The process is typically broken down into:

• component preparation,
• sub-assembly manufacturing and test,
• final assembly and test, and
• packaging.

Companies apply numerous quality-assurance steps along the way, as well.

Assembly operations typically consist of multiple assembly machines that are specially designed and manufactured to complete specific assembly functions on a device. In addition, workers complete manual assembly. Due to the small size of the parts utilized, components are sensitive to specks of material like dust and hair. Workers are required to wear clean room suits that cover most of the body to prevent contamination. This operation usually takes place in a clean room environment, which is also temperature-controlled to prevent overheating and damage to the components.

Speed of microchip production limiting output

Smartphones remain at the cutting edge of technology, as advances in wireless networks enable devices to operate faster and faster. A key component to increasing the speed of a smartphone is the microchip processor. Newer chips categorized as Long Term Evolution, or LTE, enable speedier connections to network providers. While this technology enables a quicker online browsing experience, it also can slow smartphone production. For example, Qualcomm, a major producer of LTEs, announced in April that it had been unable to keep up with demand for its S4 Snapdragon processor. This technology had been scheduled for use in more than 150 Android and Windows devices.

Supply-chain management solutions required to meet growing demand

Shipments of smartphones are expected to total 655 million in 2012, more than doubling totals from 2010. Recent research by the Pew Internet and American Life Study suggests that half of domestic mobile-phone users utilize smartphone technology, and similar adoption rates are being realized in European countries, such as the United Kingdom and Spain. Boosting supply levels to meet this growing demand requires sophisticated and complicated supply-chain solutions. Large third-party logistics organizations provide the necessary customs benefits, inventory tracking and visibility and transportation modes to meet the complicated issues associated with exporting to a wide variety of markets, both established and emerging. Overall, companies must take the necessary time to evaluate options and to invest in appropriate technology and partnerships that will facilitate effective, efficient distribution globally.

Product testing plays a large role in the manufacturing process. Quality-assurance testing is done throughout assembly, for functionality as well as durability. If a phone does not pass testing, then it will be rejected. After the device passes all QA testing, it will be packaged and readied for shipment.

Operating-system developers encouraging limited device options

Much of smartphones' evolution is driven by their operating systems. The two major operating systems are Android (developed by Google) and iOS (developed by Apple). As of publication, Android holds a 51-percent share of the U.S. smartphone market, with iOS at 31 percent. Both companies develop and release their software platforms in very different ways, and that strategy impacts device makers. Android is an open software that is very customizable for device manufacturers, but iOS remains closely guarded by Apple. Android software is developed by Google, but Google does not manufacture hardware. Rather, phones are made by device manufacturers including Samsung, Motorola, HTC and others. On the other hand, Apple manufactures devices that run iOS. The company typically only releases one new device per year.

In the past, Google has found far too many different handsets put on the market by the same manufacturer, which has made upgrading the software and releasing bug fixes much more difficult. Accordingly, Android-device manufacturers have pledged to make fewer new devices and focus more on quality in the future. Apple streamlined iOS updates from the onset by keeping its device offering extremely limited.

DEMAND

Wireless-carrier subsidies fueling demand

Smartphone adoption continues to increase in the U.S. and is expected to continue, largely due to declining prices and carrier subsidy levels, which decrease the price for consumers signing extended contracts. Phone prices have historically sold for between $199 to $299 with an extended contract (often two years); however, lower-cost options, priced at $100 or less, continue to appeal to cost-conscious consumers unwilling to pay for smartphone features they don't plan to use. Because of this, industry experts expect for prices to decline, even for higher-priced options.

Although there will always be tech-savvy buyers desiring the latest and greatest options, the market is presenting opportunities for lesser known device manufacturers, such as ZTE and Huawei, who produce less robust yet quality smartphones for entry-level end users.

China leading global demand

With 1.3 billion people, China's potential marketplace is massive. It currently leads as the world's top market for smartphones. In the first quarter of 2012, China accounted for 22 percent of global smartphone shipments. In comparison, the U.S. accounted for just 16 percent. Easily accessible retail channels offering low-cost smartphones have helped to drive growth in numerous countries. While premium smartphone options like Apple's iPhone and Samsung's Galaxy carry the greatest cache in the Chinese market, entry-level devices priced below $160 (1,000 yuan) offer high-volume opportunities for chipmakers. Qualcomm, a U.S.-based chipmaker, has taken aim at this segment of the market, which has historically been dominated by Taiwanese and Chinese manufacturers.

Consumer replacement rate remains the highest domestically

Smartphones are on pace to become one of the most widely accepted consumer technologies of all time. In March, Nielson reported that 49.7 percent of mobile-phone users now own smartphones. It took less than eight years to reach this milestone, faster than any of the other technologies noted below.

Like computer software, smartphones rapidly evolve and can become outdated within a matter of months, leading shoppers to demand newer technology. According to a Recon Analytics study conducted in 2011, the average domestic replacement rate was one year, nine months – the shortest time period in the world. In comparison, consumers in Germany and Spain replaced their devices after four years. This rapid replacement rate indicates that the U.S. has greater access to mobile networks, device options and service than any other country in the world.

Increasingly, smartphones are becoming the omnipresent device for consumers, and growth numbers suggest this trend will not stop soon. Device manufacturers and affiliated companies can expect steady future demand as buyers continue to opt for smartphones over traditional phones. Overall, the future appears to be in consumers' hands.

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About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.