UBS Asks: Is The Smartphone The New PC?

• As the smart-phone market reaches maturity, will it avoid the fate of the PC market?
• Gareth Jenkins of UBS answered the question, noting that a surge in demand from large markets could fuel growth for years to come.
• The analyst also cited high retention rates among large smart-phone makers.

Gareth Jenkins of UBS conducted a survey of more than six thousand global smart-phone users to determine if the smartphone market will begin showing signs of sustained declines in units and revenue, much like what has been seen for PCs. Jenkins noted that while near-term demand for smart phones will be "difficult," Apple Inc. AAPL's dominance shields the company from taking part in any slowdown. "While we see maturity in the smart-phone market, which means volumes may decline in some years, in general we still expect unit growth based on a variety of structural factors, including the high retention rates enjoyed by larger vendors (particularly Apple), which enable them to force the pace of the upgrade cycle," Jenkins wrote. "For the tier two vendors, however, the smart-phone market will feel like the PC market, and we expect a continued deterioration in the outlook for the sub-scale vendors. With that said, Jenkins prefers the "strong warriors" from an investment standpoint given their global scale and branding. The analyst singled out Apple and Samsung as fitting in this category, with their 82 percent and 63 percent retention rates. On the other hand, the analyst is "more selective" among the "arms dealers" – suppliers that can gain market share or value only in a low-growth environment. How Mature Is China, India? Companies like Apple have been looking at the Chinese market to fuel growth. However, the key question remains just how mature is China? Jenkins continued that statistics on smart-phone penetration in China is "many and varied." While government data encourages the thesis that China remains underpenetrated, the analyst's propriety study showed that over 90 percent of respondents already own a smartphone. Jenkins added that the average handset life is rising across all regions, except Japan. On average, a cell phone user keeps their device for 1.98 years, but the most recent survey pointed to a lifecycle of 2.05 years in China, along with the US and UK. In addition, the level of uncertainty of users in China about when a user plans on upgrading their device has risen from 15 percent last year to 18 percent this year. Meanwhile, India's 1.3 billion population (in 2014) represents a region of growth as the smart-phone market stands at a 30 percent smart-phone penetration rate, well short of the world average of 55 percent. As such, the company's increasing middle class with a higher propensity to consumer, and increased investments in infrastructure, support a thesis that India will see large gains in smart-phone adoption.