Apple (AAPL) has led the smartphone revolution since the advent of the first iPhone in 2007. It sold a whopping 217 million iPhones last year. Accordingly, it will be hit particularly hard as the smartphone slump picks up the pace.
Indeed, it seems this revolution is rapidly coming to an end. Last week, Taiwan Semiconductor (TSMC) confirmed that chip demand by the smartphone industry is growing weaker. This is a key indicator because TSMC is the world’s largest chipmaker and a key supplier to smartphone manufacturers like Apple.
Moreover, this is on top of data from last year that smartphone demand had already peaked. Research firm Intelligent Data Corporation shows that demand shrank last year for the first time since the Great Recession.
Furthermore, this smartphone demand decline accelerated in the fourth quarter. Shipments fell 6.3% year-over-year to 430.7 million units.
Market penetration is likely nearing its natural limit at 63% on a global basis. Some 4.77 billion consumers now own smartphones out of a total of 7.6 billion people.
Lack of innovation driving smartphone slump
Smartphone manufacturers are unable to generate the innovation necessary to entice existing customers to refresh their products. Exorbitant price points make this problem worse.
Indeed, this is the same problem that has plagued tablets and personal computers before it. The decline in tablet demand could be the harbinger of things to come for smartphones. The two product categories are extremely similar.
If that’s the case, the future for smartphones is very bleak. Tablet demand has fallen 13 straight quarters with sales taking a particularly painful 7.9% dive in the fourth quarter of last year. I expect smartphones won’t fall as precipitously but will continue to drift lower in the coming years.
Apple and other smartphone manufacturers can reverse this trend by innovating and adding valuable new features to their products. This seems unlikely because the smartphone category is more or less mature at this point.
Moreover, the new bells and whistles added annually have become increasingly underwhelming. Accordingly, smartphone demand will continue drifting lower until the early 2020’s when 5G is expected to roll out.
Relief is a long ways away and the smartphone slump is growing. Samsung and Apple are due to report earnings this week and next, respectively. The earnings release from the world’s top two smartphone manufacturers should confirm the severity of the smartphone slump.
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