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How Apple lost China to two unknown local smartphone makers

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, in Henan province, 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 (HK$45), they escalate for more expensive handsets and reach almost 200 yuan for Oppo’s high-end smartphones.

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“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 Chinese manufacturers’ charge against Apple and Samsung Electronics. 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. Their labels graced one out of every three smartphones sold in China in the third quarter of this year, while the Apple iPhone’s market share – 7 per cent – was its lowest in almost three years.

Oppo and Vivo trace their origins to reclusive billionaire Duan Yongping 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 programme, she estimated the two were the top spenders in the past year. “They’re doing something different – they do local marketing.”

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China had for years driven Apple’s growth. The US company generated almost US$59 billion of sales in China in the fiscal year ending in September 2015, which was more than double the level just two years earlier. At its peak, China yielded almost 30 per cent of its revenue and Apple was neck and neck with Xiaomi for the mantle of market leader as users clamoured for the larger iPhone 6 models. Even as the mainland economy began to sputter, Apple chief executive Tim Cook spent a good chunk of an earnings call last year talking up China’s promise, saying Apple was investing there “for the decades ahead”.

Then the mainland’s economic slowdown and regulatory tangles took their toll. Authorities intervened, blocking iTunes Movies and iBooks, ending a period of near-unimpeded growth. But perhaps most crucial was the ascendancy of cheaper but just-as-good local alternatives.

Together, Oppo and Vivo shipped about 40 million smartphones in the third quarter, about 34 per cent of devices sold in the world’s biggest market, according to IDC. In 2012, their combined share was about 2.5 per cent. 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 per cent, according to Counterpoint Technology Market Research.

As Apple has faltered in China, Cook has stepped up his courtship of decision-makers. He has visited the mainland several times this year, unveiled plans for research centres in Beijing and Shenzhen, and invested US$1 billion in Uber rival Didi Chuxing. Cook said on his last earnings call he remained confident of a return to growth this quarter.

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Oppo and Vivo pack high-end specifications into a phone that sells for a fraction of its rival’s offerings on the mainland, where iPhone 7s start at 5,388 yuan. Consider the Oppo R9 plus: for 2,999 yuan, buyers get an aluminium body, six-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.

“Both companies invested heavily in marketing,” said Nicole Peng, Asia-Pacific research director at consultancy Canalys. Oppo and Vivo had a strong grip on the middle market for phones from 1,400 yuan to 3,400 yuan, she said. “Their offline channel strategy paid off.”

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

While Duan has kept a low profile since moving to the United States in 2001, he occasionally makes his way into the spotlight. In 2006, he bid a then-record US$620,100 to have lunch with billionaire US investor 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. 

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

While Xiaomi shot to international prominence with flashy, online promotions, that success has been concentrated in densely packed cities. That doesn’t work so well in the countryside, where novice buyers want advice and demonstrations. By cultivating a physical network, Oppo and Vivo are building a platform difficult to replicate in the short run. 

Apple, in contrast, has fewer than 40 stores across China, most of which are in large cities. While its retail network is lauded for helping weave an aura of exclusivity and chic around its higher-priced gadgets, Chinese consumers – particularly in smaller, poorer cities – value access to someone local who can work out kinks. That sort of after-sales support was in itself a powerful marketing tool, Jin said.

Oppo and Vivo executives said they planned to stick to their winning strategies, while exploring ways to keep pushing the smartphone envelope.

“We have to keep our minds clear in the fast-changing market,” said 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.”

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

That message resonates with the likes of Chen Siyu, an accountant who uses her Vivo phone at least four hours a day to chat with friends, watch videos and apply for jobs.

“I chose Vivo because of its design and photographing capability,” said the 26-year-old who lives in the town of Putian in Fujian. “It is not expensive and doesn’t slow down after long-time use like many Android phones do.”