Smartphones Drive New Global Tech Cycle, but Is Demand Peaking?

IMF Blog, February 8, 2018

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Over a decade of spectacular growth in smartphones created a new global tech cycle that "last year produced a new smartphone for every fifth person on earth."
While the global smartphone market may be saturated, demand for other electronics continues to support rising semiconductor production in Asia.

Global smartphone sales in 2016 reached almost 1.5 billion units.
China exported $107 billion of smartphones to the rest of the world in 2016, equivalent to 5 percent of the nation’s total exports.
In South Korea, semiconductor exports were 17 percent of total exports (2016 context).
At the peak of the cycle, components for smartphone production accounted for:
- more than a third of total exports from Taiwan Province of China,
- 15 percent of exports from Singapore and South Korea,
- 11 percent of exports from Malaysia.
OECD data on value added by the computer, electronics, and optical sectors:
- South Korea: 7.4 percent of total value added in 2013.
- Japan: 2.1 percent in 2012.
- Ireland: 2.0 percent in 2012.
The percentages "probably increased substantially in years since, reflecting the new tech cycle."

Demand for smartphones is highly cyclical and linked to the release of new models.
The new tech cycle differs from the earlier PC-associated cycle and cannot be captured by standard seasonality; it "depends on the release dates of Apple Inc. iPhones."
The cycle subdivides into two components:
- Pre-release: export of components from several Asian countries to China (the producer of most smartphones).
- Post-release: shipments of smartphones from China to the rest of the world.
Apple iPhone sales growth example:
- 35.1 million units in the first quarter of 2012.
- 78.3 million units in the fourth quarter of 2016.
A quarterly pattern: second- and third-quarter sales are usually weaker, reflecting expectations of a fourth-quarter release.
The amplitude of this quarterly pattern has been established since the September 2014 release of the iPhone 6/6 Plus.
There are clear spillovers from the fourth quarter into the first quarter, ahead of the Chinese New Year.

The analysis suggests the new tech cycle may have peaked in late 2015 and reached a high point in September 2015, accounting for annual 15-day factory shutdowns for Chinese New Year.
China’s domestic smartphone market declined in 2017 for the first time.
Apple recorded a year-on-year decrease in iPhone sales in the fourth quarter of 2017.
Industry projections still foresee increases in unit sales, but the analysis indicates smartphone makers "may have to count on price increases to support continued revenue growth."
Concurrent sectoral dynamics:
- Asia continues to gain market share in embedded automobile computers, smart appliances, and wearable devices.
- Trend demand for South Korea semiconductor exports "continues to accelerate," despite the slowdown in global smartphone sales.
- The underlying trend in electronic export orders "also remains strong in Taiwan Province of China."

The smartphone-driven tech cycle has materially reshaped exports and growth performance across several Asian economies.
If global smartphone demand is peaking or saturated:
- revenue growth for smartphone makers may increasingly rely on price increases rather than unit growth,
- component and semiconductor producers may see offsetting demand from other consumer electronics (embedded automobile computers, smart appliances, wearables).
Semiconductor production in Asia is being sustained by demand outside smartphones, supporting continued export growth in jurisdictions with large electronics value chains.

Source: IMF blog post by Benjamin Carton, Joannes Mongardini, Yiqun Li — February 8, 2018.