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The Smartphone Market Is Expected to Tank 12% This Year Thanks to COVID-19

By Evan Niu, CFA – Updated Jun 5, 2020 at 5:40PM

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The pandemic will hurt smartphone demand for the rest of the year.

The smartphone market is among many industries getting crushed by the coronavirus outbreak, registering its biggest decline ever in the first quarter after the pandemic simultaneously gutted supply chains and destroyed demand, with consumers fearing a potential recession on the horizon. As the world continues to grapple with the disease, smartphone shipments are expected to remain under pressure for the rest of the year, according to recent estimates from market researcher IDC.

Here's what smartphone investors need to know.

Green iPhone 11 Pro

Image source: Apple.

Conditions won't improve until 2021

Smartphone volumes in the first half of 2020 are expected to fall by 18% as the coronavirus crisis continues to hurt discretionary spending. There could be more pain in store for the rest of the year, as IDC does not believe that smartphone shipments will return to growth until the first quarter of 2021.

"What started as a supply side crisis has evolved into a global demand-side problem," said IDC senior research analyst Sangeetika Srivastava. "Nationwide lockdowns and rising unemployment have reduced consumer confidence and reprioritized spending toward essential goods, directly impacting the uptake of smartphones in the short term."

Hopes were running high at the beginning of the year that 5G handsets would spur a wave of upgrades, but the coronavirus had other plans in mind. In particular, Apple (AAPL 0.23%) is widely expected to add 5G cellular capabilities to its flagship iPhones this year. Other prominent smartphone original equipment manufacturers like Samsung had already started to introduce 5G models in 2019.

The public health crisis is impacting different countries and markets in varying degrees, oftentimes dependent on how quickly and effectively public health officials and governments respond to the virus. China has taken extreme measures to combat the disease, which has allowed much of the global consumer electronics supply chain to resume operations. For example, Apple's supply chain was able to get "production ... back at typical levels toward the end of March," CEO Tim Cook said on the last earnings call.

The Chinese smartphone market -- the biggest in the world -- should only shrink by single digits this year, in IDC's estimation. Certain European countries like Italy and Spain have been hit especially hard by the coronavirus outbreak, which is why that region will likely experience a double-digit decline.

It's also worth noting that the broad shift to remote working has driven a spike in demand for PCs and other peripherals that facilitate working from home, which takes a bite out of consumer smartphone budgets. Furthermore, spending on entertainment products like video game consoles is on the rise, further pinching how much money people have to upgrade their phones.

These factors could encourage smartphone vendors to price 5G handsets more aggressively. Considering the iPhone 11's price drop last year, Apple has seemingly recognized that it has hit the limit of its pricing power, but it remains unclear how the company intends to position 5G iPhones.

"There's no question that challenges lie ahead for the smartphone industry and we believe the economic downturn is going to cause some fluctuation in the vendor and price-tier landscape," adds IDC's Ryan Reith.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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