Fitch warned recently that both Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF) could be poised to struggle. The ratings agency said both companies are likely to experience market share-losses in the near future, as cheaper handsets from competitors take up a progressively larger share of the market.
Fitch's projections are hardly surprising -- indeed, if its estimates prove accurate, it would merely be a continuation of trends that have been ongoing for quite some time. Yet, it does serve to highlight the increasingly fragmented nature of the handset market -- it's no longer a two-horse race.
Pressure from China and India
Fitch expects the market share declines to come at the hands of Chinese and Indian rivals. In particular, Fitch mentioned Xiaomi, Lenovo, Huawei, and Micromax as handset manufacturers set to grab a larger share of the global smartphone market.
Xiaomi's growth has been nothing short of impressive -- by borrowing heavily from Apple and Samsung, the four year-old smartphone vendor has emerged as the top-selling handset manufacturer in China. Xiaomi's strategy, which involves selling high-end hardware at bargain prices, has proven to be wildly successful in its home country -- Xiaomi is attempting to transplant that strategy to other emerging markets like India and Brazil. If it succeeds, Xiaomi could take a larger share of the next billion smartphone owners.
Lenovo, too, has become a force in the Chinese smartphone market. According to research firm Canalys, it sold just as many handsets in China last quarter as Samsung. Like Xiaomi, it primarily sells budget devices, but unlike Xiaomi, it may have a better chance at breaking into developed markets -- its acquisition of Motorola Mobility, set to close next year, will give it ownership over one of the world's most well-known handset brands, and a slate of high-end products, including the Moto X and Moto 360.
Huawei doesn't have the Motorola brand, but the company is willing to release high-end hardware on its own. On Friday, Huawei unveiled an expensive flagship handset with a sapphire display and fingerprint scanner -- the Ascend P7 Sapphire Edition.
Then there's Micromax, an Indian handset vendor that's taking a progressively larger share of its home market. Last quarter, it manufactured 19.1% of the smartphones sold in India, compared to 16.7% in the first quarter. Samsung's market share, meanwhile, tumbled from over 33% to 25.3% in the same time period.
Apple will lose, but not as much
Although Fitch expects both Apple and Samsung to lose share in the coming quarters, it sees more downside for the South Korean tech giant. Apple's share of the smartphone market, which was around 15% in 2013, is expected to contract just 1% by 2015. Samsung's, however, is projected to experience a much more severe drop-off, falling from 31% to 25%.
This discrepancy may be a byproduct of their differing strategies. While Samsung has released Galaxy phones in a multitude of different price ranges, Apple has largely stuck to the high end. Customers who have bought Samsung's phones in the past, then, simply because they were cheap, may find it far easier to switch to a rival handset manufacturer.
Samsung also lacks Apple's operating system monopoly: If a handset customer wants iOS, they have no choice but to purchase Apple's iPhone. Samsung uses Android -- the same operating system employed by nearly all of its low-cost rivals -- making it easier for consumers to switch.
The recent Android One initiative, in particular, could be quite devastating to Samsung's market share. In India, Google is working with a variety of local handset manufacturers (including Micromax) to produce Android phones at bargain prices. If successful, the devices should be highly competitive with Samsung's own offerings. Apple, with its ownership of iOS, would never face such a threat.
If Fitch's projections prove true, Samsung will still sell more smartphones than Apple next year, but it has much more to lose.
Giving up the fight
Apple, by its own admission, has never really concerned itself with market share figures -- rather than make the most phones, the company has consistently insisted that it only desires to make the best phones.
Samsung may be coming around to Apple's line of thinking. Rather than compete more aggressively on price, the company seems to be innovating at the high end, offering new, more expensive phones, like the Galaxy Note 4 Edge, with features its budget competitors can't match.
As long as both firms can sell high-end handsets with a healthy margin, their market share declines may not -- directly -- be a cause for concern. But the days of Apple and Samsung collectively dominating the smartphone market appear to be rapidly coming to an end.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.