How Apple and Samsung Lost to 2 Unknown Brands

From Bloomberg news dated 23 November 2016 (abridged version)

Two years ago, Oppo and Vivo couldn’t crack the top five in China’s smartphone market. Now they outrank everyone after elbowing Apple aside, thanks to people like Cheng Xiaoning.

Cheng runs a thriving electronics store in the rural town of Miaoxia, tapping into her WeChat social media account to promote the brands that pay the biggest commission, and in her case that’s Oppo and Vivo. While such payments start at about 40 yuan (US$6), they escalate for more expensive handsets and reach almost 200 yuan for Oppo’s high-end smartphones.

“That’s why I like to introduce the Oppo R9 Plus to potential customers,” she said. “Business has been perfect, actually never been better.”

Cheng and tens of thousands of like-minded boosters form the vanguard of the pair’s charge against Apple Inc. and Samsung Electronics Co. Working with the local stores that dominate sales in China’s far-flung provinces, Oppo and Vivo came out of nowhere to upend the industry order and squeeze out former local darling Xiaomi Corp. Their labels graced one out of every three smartphones sold within China in the third quarter, while the iPhone’s market share at 7 percent stood at its lowest in almost three years.

Oppo and Vivo trace their origins to reclusive billionaire Mr Duan Yong Ping and employ similar strategies. That includes harnessing the spending power of rural customers away from top-tier cities such as Beijing and Shanghai. It’s where Apple’s vulnerable given the iPhone’s lofty price tag. They eschewed e-commerce to instead court the stores where three-quarters of smartphone sales take place. Apple has been more reluctant to relinquish the retail experience to local free-agents, who sometimes charge brands for in-store displays and posters.

“Oppo and Vivo are willing to share their profit with local sales. The reward was an extremely active and loyal nationwide sales network,” said Jin Di, an IDC analyst based in Beijing. While they declined to detail their subsidy program, she estimates the two were the top spenders in the past year. “They’re doing something different -- they do local marketing.”

Together Oppo and Vivo shipped about 40 million smartphones in the third quarter of 2016, about 34 percent of devices sold in the world’s biggest market, according to IDC. In 2012, their combined share was about 2.5 percent. IPhone shipments plunged more than a third to 8.2 million during the period -- less than half of Vivo’s. Samsung, which once led the market, now settles for roughly 5 percent, according to Counterpoint.

Oppo and Vivo pack high-end specs into a phone that sells for a fraction of its rival’s in China, where iPhone 7s start at 5,388 (US$784). Consider the Oppo R9 plus: for 2,999 yuan, buyers get an aluminum body, 6-inch display, 16-megapixel camera and a battery that claims 19 hours of calls, photo and web browsing. Vivo’s high-end Xplay6, with a price tag of 4,498 yuan, also undercuts Apple.

The man who’s clobbering Apple started out low on the tech spectrum. Duan mae his fortune selling DVD players, telephones and game consoles similar to Nintendo’s. Bubugao Communication Equipment Co. Ltd., the parent of Vivo, emerged from a restructuring in 1999 that split his company. The billionaire later teamed with long-time colleague Tony Chen and others to found what came to be known as Guangdong Oppo Electronics Co.

While Duan has kept a low profile since moving to the U.S. in 2001, he occasionally makes his way into the spotlight. In 2006, he bid a then-record $620,100 to have lunch with Warren Buffett. Oppo’s first smartphone came in 2011, when it unveiled a device with a BlackBerry-like keyboard. The same year, Bubugao created the business that would become Vivo. 

Today, Vivo touts its cameras and Oppo focuses on rapid-charging and battery life. But their offline strategies remain the same: mobilizing tens of thousands of private shop owners. Oppo said it sells its products through roughly 240,000 privately owned stores as of June -- six times the global count of McDonald’s. Vivo manages about half that, said Jin. Oppo, which doesn’t disclose sales figures, said about 90 percent of its phones were sold offline. 

“We have to keep our minds clear in the fast-changing market,” sid Allen Wu, Oppo’s vice-president in charge of sales. “All we need to do is to keep our heads down and make the correct moves.”

To Vivo, that means targeting younger users with higher-performance devices. “Camera and music will be our key focuses in the future. We are seeing greater customer expectations out of these two areas,” company vice-president Ni Xudong said.