Over the past few years, the mobile handset market has witnessed significant transformation with changing consumer demands. Traditionally, basic and feature phones have dominated the mobile handset market due to their low cost and high reliability. However, higher demand for bandwidth-intensive applications and mobile broadband services; and growing availability of 3G and long term evolution (LTE) networks is leading to rising uptake of smartphones across the Southeast Asian region. As per research organisation GfK Asia, the region recorded sales of 41.5 million smartphones worth $10.8 billion during January-September 2013, as compared to 25.8 million smartphones worth $7.54 billion during the corresponding period in 2012.

The adoption rate of smartphones varies significantly across the region. According to a recent study by GfK Asia, while smartphone penetration in Singapore and Malaysia is about 87 per cent and 80 per cent respectively, that in Thailand, Indonesia and the Philippines stands at about 49 per cent, 23 per cent and 15 per cent respectively. Given the current low uptake, the latter countries are unsurprisingly witnessing the fastest rate of smartphone adoption in the region.

Several factors are driving uptake in Southeast Asia. First, most customers are demanding high speed broadband connectivity on the go. While feature phones offer internet connectivity, these handsets support only 2G data technologies (GPRS/EDGE), which impacts the user experience, especially in the case of video services. In contrast, smartphones support both HSPA and LTE, which are capable of offering speeds of over 1 Mbps. A rapid decline in smartphone prices has been a key driver for service uptake, especially among price-conscious customers. In mature markets, operators bundle smartphones with data plans under a multiple-year service contract in order to reduce the upfront ownership cost of the handset. This strategy has resulted in huge gains for operators as smartphone adoption has picked up significantly. In contrast, most operators in the Southeast Asian region have been wary of following this model due to their concerns related to payment default by subscribers. However, with price reduction, smartphone uptake has increased in the region without the need for bundling. Also, operators have reduced tariffs to drive uptake of data services. Consequently, more customers are buying smartphones to avail of bandwidth-intensive video and gaming services. In Malaysia, in particular, a rebate of MYR 200 by the government on the purchase of smartphones has encouraged buyers and smartphone sales have increased significantly over the past year.

The increasing adoption of smartphones in Southeast Asia is providing manufacturers some room for growth given the limited scope for expansion in the US and European markets. These markets already have a high smartphone penetration and are not likely to generate significant demand in the future due to the long replacement cycle of smartphones. IDC has predicted that global smartphone sales growth will decline from 40 per cent in 2013 to 8.3 per cent in 2017, primarily due to a slowdown in the US and Europe. As a result, several manufacturers are increasingly focusing on emerging markets including Southeast Asian countries to maintain business growth. However, they may struggle to achieve margins in these countries as compared to those offered by the US and European markets. The decision of most customers in Southeast Asian countries on buying smartphones is primarily based on their prices. Encouraging new customers to buy these devices would require a further reduction in their prices, which would impact the margins of manufacturers. This is one of the reasons why these markets are not a key focus area for Apple, Inc., the manufacturer of the iPhone. On the upside, high sales volumes may help manufacturers to offset the fall in margins. Nevertheless, Southeast Asian countries offer significant growth potential for smartphone manufacturers, who are facing increasing competition in these markets. At present, Samsung, which launched several new handsets in 2013, is the biggest player in the region. Nokia and BlackBerry, which were the dominant companies before the emergence of touchphones, have seen their market share fall drastically despite concerted efforts to strengthen their brands through the launch of new smartphones (Nokia’s Lumia series and BlackBerry’s Z10 and Z5). Apple, which marked a good beginning in terms of sales in the region, is struggling to sustain growth as new customers are price conscious. Chinese manufacturers such as Huawei, Lenovo and ZTE, which are rapidly expanding their business across the world, are providing competition to these companies. These players have already broken into the list of the top 10 global smartphone manufacturers in terms of market share and are offering a range of affordable smartphones for various customer segments to increase the share.