China Research

In May 2012, I shared a prediction in these pages about China becoming the largest consumption market for PCs (notebook PCs plus desktops) in the world, surpassing the United States plus Canada market by year’s end. In this essay, I will share estimates that China did indeed fulfill this expectation but then experienced the same slowdown in PC purchases that affected the US plus Canada and most of the world markets in 2013. My source will be Intel Corporation estimates, for which I thank Intel but which do not necessarily represent Intel’s positions, strategies, or opinions. Our best data estimates and empirical studies suggest that the slowdown in PC sales was principally caused not by the absence of strong economic growth but instead by competition from media tablets such as Apple’s iPad and smartphones such as Apple’s iPhone and Samsung’s entries as well as cheaper competitors.

In any discussion of Information and Communication Technology (ICT) numbers, it is important to recognize the imprecise and inferred nature of any numerical estimates. Agreement on historical “actuals” is as hard to reach as agreement upon forecasts. I have joked in public forums that the Information Technology (IT) industry is not very good with information but this is, in fact, true and is a testimony to the dynamic nature of the industry in which new usages of new devices sell through rapidly changing distribution channels and keep observers and users second-guessing history and trends. In this note, the reader is advised to keep the limitations of the data and the speculative nature of estimates and forecasts in mind.

In the first year for which Intel has fairly complete historical estimates, namely 1995, US plus Canadian sales of PCs were approximately 26 million units while China sales were about 2 million units. By 2011, sales figures had nearly converged with US plus Canadian sales of 78 million units and China sales of 75 million units. The incredibly fast growth of the emerging China markets relative to the growth of the established US plus Canada market made my earlier prediction of crossover by the end of 2012 seem safe. And, in our best estimate, 2012 sales were indeed greater for China than in the US plus Canada market. China’s sales figures grew to 77 million while the US plus Canadian markets contracted to 71 million. By 2013, US plus Canada sales had fallen to 68 million and China had experienced a contraction in sales to 71 million. When I predicted crossover of sales figures by the end of 2012, it was with the expectation of continuing growth in PC sales in both markets with China rates exceeding US plus Canada rates. Instead, the US plus Canada market contracted in 2012 and 2013 and the China market contracted in 2013.

Both markets had their own economic challenges in 2012 and 2013 continuing into 2014 and these problems certainly limited PC sales. In both geographies, our econometric models continue to show strong income elasticities in both consumer and business markets so stronger economies would almost certainly have led to higher PC sales. The main cause of unexpectedly low PC sales, however, was probably the advent of a new device competing with notebooks and desktops, namely media tablets. The Apple iPad launched in April 2010 to great fanfare. By the end of the year, competing Android tablets were gaining share and tablet sales had reached 8 million in US plus Canada and 1 million in China. In 2011, 2012, and 2013, tablet sales in US plus Canada were estimated to be 28 million, 51 million, and 61 million, respectively. For the same years, China sales were estimated to be 8 million, 22 million, and 38 million, respectively. All of my earlier warnings about the imprecision of estimates of purchases apply even more strongly for tablets due to the rise of a broad network of tablet design and manufacturing houses and factories in what is called the “China tech ecosystem” (CTE) centered in Shenzhen.

CTE-produced tablets are sometimes made for multinational corporations well known in PC markets and sometimes badged with local and changeable names. The early CTE tablets were generally much cheaper and probably of much lower quality than the market leading tablets sold by Apple and Samsung. Some were probably uncounted in surveys that missed the smaller, less central manufacturers and others might have been double-counted if reported both by the CTE shop and the brand name customer of that shop. Nevertheless, it is highly probable that tablet sales displaced millions of PC sales and led to contractions in unit sales in both the US plus Canada market and the China market. Given the numbers that I’ve shared here, you can also see that the market for tablets has been strong enough in the US plus Canada relative to China’s tablet market to keep China from catching up in combined PC plus tablet sales. In other words, while my 2012 prediction published here was technically correct, it was not true when tablets were included.

The question, then, is whether tablets should be included in an expanded view of PCs. Our marketing, ethnographic, and economic research at Intel lead us to conclude that tablet sales have indeed displaced millions of PC sales. The most likely story is that tablets are quite suitable for email, social networking, browsing on the Internet, and for movie and music enjoyment. They may eventually achieve parity or superiority for other purposes but for most office work, including creation of long texts, spreadsheets, and presentations, PCs still seem superior. I am writing this essay, for example, on one of the new “two-in-one” notebooks that function as both PCs and tablets. Furthermore, I am doing this entirely in the PC mode although I keep two tablets and a smartphone nearby for further support.

Ironically, just as industry observers and participants are now almost all convinced that tablets have displaced millions of PCs, we may be witnessing the eclipse of tablets by the last year or two of sales of so-called “phablets”, that is smartphones with screens larger than 5 inch or 5.5 inch when measured diagonally. The category of phablet was first apparent with the success of the Samsung Galaxy Note smart phone with a 5.3 inch screen in October, 2011. Later Note models have grown in size to a 5.7 inch screen while Apple has now joined the fray with its 5.5 inch iPhone 6+. In Intel’s latest market research we see evidence that approximately 25% of US homes and 30% of China households already own a phablet. Evidence arrives regularly in both our own research and in third party research that phablets are now displacing sales of the smaller, 7 inch tablets. Smaller smart phones with less than 5 inch or 5.5 inch screens continue to sell in hundreds of million units worldwide both due to some savings on smaller phones and the difficulty of using too large a phone with one hand or for voice phone calls. Nonetheless, the market has pivoted again making the job of tracking and forecasting ICT uptake as challenging as it has ever been.

The proliferation of tablets, two-in-one PCs, and smartphones as well as “all-in-one” desktops (exemplified, as usual, by a successful Apple product, namely the iMac) has created great interest in understanding the “multi-device” household. Here is what we think we know about US and China households. Our monthly surveys of households in the US and in China show that about 90% of American homes own at least one PC, about 70% at least one smartphone, and about 50% at least one tablet. About 60% of China homes own at least one PC, about 80% at least one smartphone, and about 10% at least one tablet. Hence the US consumer segment is PC-centric while the China consumer segment is smartphone-centric.

Looking at the intersection of ownership of various devices, 44% of American households own PCs, tablets, and smartphones. With only 10% of China households owning tablets, it is not surprising that only 8% of China households own PCs, tablets, and smartphones. Looking at the ownership of multiple PCs, multiple tablets, and multiple smartphones further highlights the differences in ownership patterns between US and China households. Of 27 possible patterns of ownership of zero, one, or two or more PCs, tablets, and smartphones, the most common configuration in the US is ownership of two or more of all three devices. One in seven US households fall into this category in the latest surveys, a frequency that has been and will probably continue increasing.

The most common configuration in China households is one PC, no tablets, and two or more smartphones owned by more than one in four households while less than one in a hundred households own two or more of each of the three devices. When interviewing respondents in both countries, the Intel monthly survey includes questions about current ownership patterns as well as past. From our survey data we can see that most transitions among US and China households involve increasing the number of smartphones from none to one or one to two or more. Other questions suggest that a favored purchase by new smartphone customers is the larger screen smartphone phablet while tablet household penetration seems stalled, at least temporarily, at its current rate of slightly more than 50% in the US and slightly less than 10% in China. It seems likely that phablets are now displacing tablets just as tablets displaced PC sales.

US and China households exhibit wide differences in their current ownership pattern but similar movements to phablets, although most of the growing US adoption of phablets comes as additions to PCs and tablets while a significant portion of the phablet adoption in China comes as first device ownership.

 

 

 

 

 

Paul Thomas
Chief Economist, Intel

 

The views in this article are my own and don’t necessarily represent Intel’s positions, strategies, or opinions.