ARM Holdings PLC China Smartphone Market Update Presentation (Pre-Recorded)

RY.TO - Royal Bank of Canada
ARM Holdings PLC China Smartphone Market Update Presentation (Pre-Recorded)
Dec 10, 2014 / 04:00PM GMT 

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Corporate Participants
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   *  James Bruce
      ARM Holdings plc - Director, Mobile Segment Marketing

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Presentation
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 James Bruce,  ARM Holdings plc - Director, Mobile Segment Marketing   [1]
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 Thank you very much for joining this webinar. This webinar will be focused on updating you on the latest trends that ARM is seeing in the China smartphone market. I would like to introduce myself. My name is James Bruce and I'm the Director of ARM's mobile segment.

 The mobile segment at ARM works very closely with key ecosystem players. This includes silicon partners, ODMs and key software and service partners. If you look at the mobile segment, it covers a wide range of products from wearable devices, through smartphones, tablets and compute devices.

 When you look at ARM technology and smartphones, it's not just the application processor which gets covered in the press, ARM technology is actually used in a wide range of SoCs and smartphones, and this can include connectivity, ancillary sensor products such as the camera sensor hub or the actual sensors themselves, and other areas such as power management, flash controllers, GPS.

 And what you fundamentally see is that these various SoCs are using a wide range of ARM technology, all the way from our Cortex-M0 plus, very low power, very small size microcontrollers, up to our high-end application processors, such as the Cortex-A57 and our graphics, such as the Mali-T760.

 Why is the China market so important? If you look at the China smartphone market, it's an incredibly important market and there's really fundamentally three aspects to it.

 Obviously, there's the size of the market, but also it's the smartphone industrial base. And what you see in China is a wide range of OEMs, a wide range of silicon companies, a supply chain that can actually support the OEMs all the way from batteries, plastics, through to touch sensors and the actual screens themselves and of course, the manufacturing capability.

 And then combined with this are the unique ecosystems in China; so the combination of operators, operating systems focused on China and the apps and services available in the China market. These three things combined together ensure that China is actually the most dynamic smartphone market at the moment.

 One of the major trends that we're seeing in the mobile market is the fact that the number of mobile subscriptions in the world has already reached the population of the earth. However, if you look at smartphone subscriptions, we're still at the point where there's only about 2 billion smartphone subscribers. So fundamentally, there is a significant market that's not using smartphones. And the China ecosystem, the China market, has been a great proof point of how consumers are moving away from feature phones to entry-level smartphones, creating great opportunities for the overall ecosystem.

 What we've seen in China is this unique China smartphone ecosystem develop very quickly and this is a combination of ARM silicon partners, be they US-based, Taiwanese-based such as MediaTek; or local silicon partners such as RDA or Spreadtrum or HiSilicon, addressing the smartphone market.

 That has been combined with products that are actually designed for the needs of these particular markets and what you see is various price points, various form factors designed specifically for the needs of this market. And what this has resulted in is a very vibrant OEM ecosystem, combined with a very vibrant Chinese app ecosystem feeding into the 1 billion consumers.

 The China smartphone market is very diverse and what we see is that both the Chinese OEMs and ODMs are addressing many different markets. And the way I categorize these markets is as follows.

 Very low cost smartphones; these are sold within China and have price points between $23 and $50. Typically, they used to be 2.5G, but now what we're seeing is 3G coming down to price points as low as $30.

 Next category are the export very low cost smartphones. These are smartphones selling at very low price points designed for the export market, going to markets such as Africa, India or Latin America. And what we're seeing is fundamentally these phones are replacing feature phones. So as I mentioned earlier, there's very strong growth in the smartphone market as consumers move from feature phones to smartphones.

 Next category are unsubsidized handsets. These can range anywhere from $50 to $500 and they're sold through traditional retail channels.

 Next category are the China carrier-specified phones, so these are handsets that the carriers have specified and actually subsidized.

 Then we have the export ODM. These are devices that are either sold to carriers to brand themselves, so for example ZT has been very successful in Europe, or it's where brands are actually building themselves up in markets such as the US or Latin America, and Blue is a very good example of this.

 You then have the export branded handsets, so TCL and Huawei are very good examples of this.

 And then probably the most interesting, and the area that's been receiving the most coverage recently, are the direct to customer models. These are handsets that are sold direct to the customer. There is no intermediaries, and Xiaomi is a very good proof point of this.

 I think a very good proof point of the success of the Chinese OEMs is very much shown by their global market share. What you're seeing now is that Lenovo, combined with Motorola, is the number three smartphone OEM in the world, and Xiaomi is coming in at number four.

 If you then look at the following handset manufacturers, apart from LG, Sony and Microsoft Lumia, they are all Chinese-based OEMs. So this is a really good proof point of the success of their business model.

 It's really interesting if you look at the top Chinese OEMs actually within China. You do actually see a difference between the listings on the previous page. And this is very much dependent upon whether the OEM is focused on the internal market, or focused on the external market or the mix of those. And what you see is, it's Xiaomi as number one in China, followed by Huawei, then Lenovo.

 And what's really interesting is how they have particular areas of focus. If you look at all these handset manufacturers, they all offer $75 to $150 handsets, but then you see particular OEMs focusing on either $300 handsets or $500 handsets. So they really play on their strengths, their marketing focus and their differentiation.

 I think one thing to keep in mind is that the white box market is still very strong, it's very vibrant, and you see that very much from the sub-$50 handsets and also in the $75 to $150 handsets. So you see a lot of creativity, a lot of different handsets from these white box manufacturers.

 If you look at Xiaomi, they're doing things different from the traditional Chinese smartphone manufacturer. The first thing is they've changed the channel distribution model. Traditionally, smartphones would be sold through small stores or other traditional retail channels. What you're seeing now is that Xiaomi is actually selling these handsets nearly at cost direct to the customer and there's really two aspects to this.

 One; by the direct to customer model, it allows them to keep the margins extremely tight. There is no middle man, and also it allows them to have extremely good inventory control. They really know how many handsets they need to build. They can order the right number of components and have very little wastage in the channel.

 The second aspect to this business model is very much about building their own ecosystem. And this is very much about offering their own content from the perspective of applications and also content such as music, video and other content sources.

 And this works really well in China. The reason it works well is unlike in, for example the US or Europe, where if you've got an Android phone and you'll normally just go to the Android app store, in China there isn't actually one app store. So having an Android handset with a built-in app store with a guaranteed quality of apps, is actually very enticing to the consumer.

 The other aspect of this is that other OEMs are now responding to Xiaomi. So what you're seeing is companies such as Lenovo and other OEMs are actually setting up direct to consumer brands. The whole intent is to offer the same sort of business model and then really compete strongly with Xiaomi. So it's going to be really interesting to see how this develops over the next year or so.

 As I mentioned earlier, China has a very unique ecosystem for the smartphones. As you saw in an earlier slide, apart from the export phones, which have the full Google mobile services, the actual handsets that are actually sold within China do not have access to the Google mobile services. So they don't have Gmail, they don't have the Google app store, they don't have Google Maps.

 Instead, what you've seen is OEMs and the ecosystem take a range of approaches. You see some OEMs just taking the Android open source project, replacing the missing applications, adding their own services on top of that. Or you actually see people taking the Android operating system and actually modifying it to offer their own unique experience. And a good example of that would be the Aliyun OS from Alibaba.

 With regards to the apps store, what you're seeing is a combination of OEMs, app stores and then major branded app stores, such as 360 or Tencent. And then combined with this, you're seeing the establishment of these very large services platforms, such as WeChat or Weibo, where you're fundamentally seeing the China ecosystem growing their own services. And this is achievable in China just by the sheer size of the market and also because it's just so vibrant and so unique.

 One of the major trends we're seeing in the China market is the move to LTE, and the reason that you're seeing a rapid move to the LTE is very much about capacity. If you look at China, it has this unique challenge of increasing smartphone usage combined with a very high population density.

 So if they were to continue with the traditional TD-SCDMA 3G networks, or to even use 2.5G, very soon they would actually reach saturation. You would actually have a point where using a smartphone in the China cities such as Beijing, would actually be untenable. So what you're seeing is a significant investment by all the operators into the LTE networks, and this is really about providing capacity, that data throughputs support their customer base.

 And good proof points for this are China Mobile. They've already installed 570,000 LTE base stations. They already have 70 million LTE subscribers by the end of this year. China Unicom is deploying in 201 cities and it's targeting to have 100 million new LTE subscribers by the end of 2015.

 And what you're seeing is to support this transition from TD-SCDMA, or previous standards to LTE, be it time domain or frequency domain, the Chinese carriers are investing heavily in the actual infrastructure. But just as importantly, they're also supporting the transition from the old handsets to the new LTE handsets through subsidies.

 So the China silicon partner ecosystem uses a wide range of SoC providers. Examples of this include Qualcomm. They've been very successful from the $75 smartphones all the way up to $500-plus premium smartphones. And they're very much the default choice for export focused handsets.

 Mediatek have a very strong focus, all the way from $30 smartphones, all the way up to super-mid smartphones; these are $300 smartphones. And I think what's really interesting about Mediatek is that their reference designs have been very powerful in getting a wide range of OEMs, ODMs into production very quickly.

 And you have seen cases where there's been 200 handset designs ready to go very soon after an actual production launch of an SoC from Mediatek. And what you're seeing now is that there's a number of export-based handsets that are now using the Mediatek SoCs.

 You've seen Spreadtrum very much focused on sub $50 smartphones, and then you've seen HiSilicon.

 HiSilicon is really interesting because they have very good modem technology. They have a Cat 6 LTE modem and they've actually integrated this with a big.LITTLE Cortex-A15 Cortex-A7 SoC with Mali graphics and this is already shipping today.

 I think one interesting thing to note about HiSilicon is that they supply to Huawei only. And I think it's really important that all our silicon partners have a roadmap to ARMv8-A. So I think fundamentally, what you're going to see next year is in the $75 and above smartphones, a very rapid transition from v7-A to v8-A in the smartphone market.

 So what's ARM's opportunity in smartphones? And I think you've really got to look at this from two aspects. So first of all, there's the overall growth in the market. So if you look at 2013 to 2018, you're seeing significant overall growth in the smartphone market, especially at the entry level smartphones and in the mid-tier.

 And what you're also seeing is the actual royalty growth for ARM as well. And what I mean by that is if you look at, for example, the entry level smartphone market and compare it to a feature phone, the actual royalty growth is 4x. So every time someone converts themselves from a feature phone to an entry level smartphone, that is a 4x increase in the royalties that ARM would collect on that particular device.

 And you're seeing this across the range of products, all the way from high end smartphones down to mid-tier smartphones and entry level smartphones. There's an opportunity to increase the royalties.

 And I think it's really important to emphasize that the Chinese ecosystem, the Chinese smartphone ecosystem, has been very good at delivering ARM technology, ARM new features at new price points. So bringing things, for example big.LITTLE, into price points that we haven't seen before.

 And I think this slide really demonstrates the opportunity for ARM technology in mid and entry level smartphones. So, for example, if you look at $333, today you can buy the Huawei Honor 6. It's based around the Cortex-A15, Cortex-A7 with big.LITTLE technology. It's using Mali-T628. So it's fundamentally using high end IP, but this handset's been delivered into the market at $333.

 And what you'll see is a move in 2018 to move to ARMv8-A, to Octa core big.LITTLE and to the appropriate generation Mali graphics. And you see this across all the price points all the way from $25 up to $280 by using a combination of Cortex A cores and Mali graphics and delivering this technology at new price points.

 And I think it's really important, as you look from 2014 to 2018 across all these price segments, you're very much going to see our silicon partners take the latest and greatest ARM technology at that price point and drive it into handsets.

 So, for example, if you look in 2018, you can conceivably see a $25 smartphone using dual core ARMv8-A with Mali graphics and you'll definitely see $25 smartphones using single core ARMv8-A with Mali graphics. And you're going to see that trend all the way from $25 to $333.

 Summary. So if you look at the China smartphone ecosystem, it's incredibly diverse. Basically, if you look at the market for end devices, it's very diverse. The range of OEMs is incredible. The range of silicon partners used is much more diverse than the silicon partners you see being used, for example, in the US. And they have a range of ecosystems.

 Also, the China is very good at delivering value. So what we're seeing is 3G smartphones being delivered at $30, a price point that was unimaginable three or four years ago.

 We're seeing Quadcore Cortex A-7 smartphones with LTE being delivered at $81 and, as I mentioned earlier, we're seeing $300 big.LITTLE Octa smartphones with Mali graphics. And I would like to emphasize that these prices are the transfer price without subsidies.

 The other interesting dynamic is 2015 is very much a year of transition. And there's two important aspects to this.

 The first part is there's going to be significant LTE deployment. This means that the operators are going to move their consumer base very quickly from TD-SCDMA to LTE. And this transition is also going to be combined with a very strong move from ARMv7-A based smartphones to ARMv8-A smartphones.

 So I've gone into great depth about the China smartphone ecosystem. But what does this really mean to ARM? And I think from ARM's perspective, it's incredibly exciting. I think first of all, large dynamic markets always create great opportunities.

 Also, the actual Chinese consumer are very engaged with their smartphones. Technical specifications, for example, the number of cores, whether it's v8-A, are very important to consumer. And what we're seeing is a virtuous upgrade cycle.

 And what I mean by that is when the consumer is buying their next smartphone, they are really looking to upgrade the user experience, the capabilities of that device. They're not looking to just replace like for like. So you're seeing them move up the actual value chain of smartphones.

 Also, the transition to LTE is creating opportunities for ARM. First of all, it's accelerating the handset replacement cycle. And also, it's an upgrade of ARM technology. As people go from a 3G smartphone to an LTE smartphone, the LTE smartphone will have more advanced ARM technology in there, more cores, Mali graphics, all creating opportunities for ARM itself.

 And I think the most exciting thing about the China smartphone market is that it's really an ecosystem about delivering ARM technology at new price points. What you're seeing is that the China ecosystem, the OEMs, the silicon partners, are taking leading edge ARM technology and delivering it at new price points.

 So ARMv8-A 64 bit support, big.LITTLE technology, multi-core CPUs, multi-core graphics and Mali graphics.

 So all of these combined are being pushed into the market and creating great opportunities for ARM.




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