The smartphone price crash is coming

Over the past few years, and especially last year, the price of smartphones bucked the trend of most electronics and rose dramatically – almost every single major flagship released in Australia from Samsung, Google and Apple averaged out at about $1,200. The iPhone X topped the charts, ranging from $1,569 to over $1,800, while the Google (Pixel 2/XL) and Samsung (8/8+/Note8) devices sat at between $1,000 and $1,400.

It seems like a long time ago when a new Nexus device was around $600 or $700, or an iPhone would be heavily discounted by carriers to a much more reasonable sub $1,000 price point. But as an arms race takes off to provide the most premium experiences at the top end – cutting edge OLED screens, face recognition, squeezable chassis – the bottom end of the market is experiencing a complete inversion in cost, revealing the true price of these devices. 

Case in point: an iPhone X costs barely US$380 to make wholesale, meaning a staggering $700 profit margin by Apple per device.

From China, with love

Within the last few years, the wholesale generic market in China has exploded – enormous factories designed to make phones for larger manufacturers like Huawei, LG, Sony, and HTC have been contracted by a host of tiny start-ups, making use of dirt cheap labour in between larger contracts, hoping to build the next big thing – made much simpler by the advent of 3D printing, free Android source code and parts so cheap they are practically free. 

While the initial run of these generics, especially tablets, were notoriously flawed and badly built in the early stages, the plummeting price of premium phone materials like aluminium and Gorilla Glass has enabled some very impressive hardware.

I was initially alerted to how crazy things had gotten when Wish, a popular “Direct from China” generics seller, emailed me about a smartphone sale. “Need a second backup phone?” it teased. “Grab one for $5.” Curious, I clicked through and found while no actual phones were selling for $5 (tricky labelling was the culprit here), I was finding some incredible deals. In the market for an Android 7, Octa-core processor, 32GB, 4GB RAM, full aluminium chassis with small bezels? AU$60. Want 6GB RAM? $50 more.

I found this shocking. The Pixel 2 XL I had just bought through work (on special for $1,249) shared most of these specs, as had the OnePlus 5T a friend had recently imported. Hell, the replacement Huawei phone I bought for $200 for my wife was shamed by it. 

Of course there are caveats: no warranty, almost certainly no updates or support, difficult to root or flash, average camera and no Snapdragon processor (many of these phones use a very capable but less powerful MediaTek chipset). But even taking most of this into account, you would still have access to Google Play in 95% of cases and the experience is largely stock.

Going cheap

To sell anything for $60 means that an entire modern Android phone can be built, packaged and shipped for under $50, considering a miniscule margin for the producer and retailer. 

The other factor is that the inclusion of a Snapdragon 635 (or equivalent mid-range chip) – which is what many of these phones in this price range or slightly higher offer – is more than enough for the basic functionality (social media, messaging, basic gaming, phone calls) most users require. Functions that don’t exist in other flagships, like dual sims and microSD expansion, are commonplace, and would be very popular.

The problem is that none of these budget makers are all that good at marketing their products, or don’t exist at a level to effectively supply warranties or ongoing support. These inflate costs, but to nowhere near the level that benefits from a 150%-plus profit margin. 

Some companies, like Huawei, Xiaomi and OnePlus are beginning to expand this market at the low end, however they are focusing their efforts in developing countries where few decent offers at lower prices exist. 

The Xiaomi Mi A1 is a 5.5inch, Snapdragon 635 phone with dual cameras, full metal body, 64GB ROM and a 3,080mAh battery. It’s rocking official, stock Oreo, 4G, a headphone jack, USB 3-C and all the other mod cons. It’s essentially an underpowered Pixel 2 and is currently only being sold in India and a few other small markets.

How cheap is cheap?

How much? $250 AUD. You could effectively buy four of them for the price of a single Pixel 2, and while it’s not OLED, it is backed by Google’s Android One program that's very similar to the Pixel’s; thus the full experience would be almost identical. 

The problem is that we aren’t buying phones based on our needs, we’re still buying phones like we have little choice. Unless you are playing the most powerful games available, or using a VR device – why do you need the latest, fastest, Snapdragon? Why lease or buy a $1,200 phone on a plan for two years when you could get something just as good, capable and supported for a quarter of the price?

OnePlus has also released their own incredibly popular, well received phone – the OnePlus 5T. Unlike the Mi A1 however, it DOES feature higher specs for power users as well as a dedicated community and ongoing support. The price? $569. 

Both of these phones don’t have local release support, yet, but there is a strong import market growing thanks to sites like Gearbest, BangGood and AliExpress which offer direct from China sales with fast shipping options, optional warranties and other hooks to draw in Western wallets.

The other caveat here, obviously, is iOS. If you want that experience, you need an iPhone, and Apple isn’t exactly going to drop the prices of its devices any more than it needs to. But the lukewarm response of the iPhone X in China, compared to comparable cheaper devices has been telling, and rumours that cheaper, less powerful options (which is has done before with the iPhone SE) are on the cards for this years’ revisions to keep them competitive in developing countries where, as Google says, “The Next Billion” users exist.

On top of that, the insane pressure that could emanate from a strong budget smartphone maker releasing a very well marketed, sub $400 device could push Samsung, Google and Apple to be much more competitive than they are. There are plenty of powerful phones on the market now – just no-one knows about them yet. Watch that change over the next few years.