SHILLING SMARTS

Two little-known smartphone brands are creeping up on Samsung and Xiaomi in China

Obsession
China's Transition
Obsession
China's Transition

This post has been updated with breaking market data.

First it was Xiaomi. Then it was Huawei. Now two other domestic brands are making inroads into China’s cutthroat smartphone industry. Their recipe for growth is simple, but their relationship remains shrouded in mystery.

Vivo is a smartphone brand that’s barely known outside of China, but it’s growing steadily in its home market. In the second quarter, Canalys estimates that its market share jumped from 4% one year ago to 8% by the end of June.

It’s currently ranked as China’s fourth most-popular brand. Xiaomi, Huawei, and Apple occupy the top three spots at roughly 15% market share each, but Vivo stands out for its growth.

Another brand little known outside China, Oppo, has achieved equivalent domestic growth, with market share steadily climbing.

While Vivo and Oppo haven’t reached Xiaomi’s rocket heights, they’ve nevertheless enjoyed respectable success amidst a stagnating market, and together make up roughly 15% of overall domestic shipments. That places them in the upper echelons of China’s fragmented smartphone industry.

The two brands have spurred sales by doing almost the exact opposite of what Xiaomi does. The latter sells 70% of its devices online, in an effort to bypass costs for offline marketing and retail distribution. Vivo and Oppo have moved in the other direction, investing in retail rather than e-commerce.

Many smartphone brands tend to price online devices cheaper than their price tag in stores, which causes resentment among the retail distributors. They also cast a wide net of distributor partners, which leads to further price cuts and thinner margins as retailers try to outprice one another.

Vivo and Oppo have bypassed these headaches by shunning e-commerce in favor of tight relationships with retail partners, thereby incentivizing them to sell more phones.

“Oppo and Vivo have a [smaller] number of distributors, but these distributors are exclusive to them,” says Nicole Peng, research director at Canalys. “They will also ensure that the product prices will not drop after six months, and will guarantee a margin level to distributors. Distributors are then encouraged to sell more phones and provide better in-store service, which helps establish a quality brand.”

The brands have also tilted their distribution network heavily toward China’s third- and fourth-tier cities, where smartphone penetration rates are slightly lower than in larger metropolises. According to McKinsey, roughly 18 percent of China’s middle class resided in third- and fourth-tier cities in 2002, but 38% will by 2020. Rising incomes and brand affinities in these cities make them a worthwhile investment for smartphone makers.

“When smartphones first came to the market, international brands like Samsung, Nokia, and Apple were very strong,” says Peng. “Oppo and Vivo started with feature phones, so if they focused on tier-one or tier-two cities, they’d find there’s no opportunity. So they focused on tier-three and tier-four cities, where the competition was a little less intense, but disposable incomes are catching up.”

Oppo and Vivo also share common advertising strategies. Both of them have sponsored TV shows on Hunan TV—look closely at episodes of Happy Camp, a popular variety show, and you’ll spot the Vivo logo (link to video in Chinese) sitting at the bottom of the screen for the show’s duration. In their print and TV ads, both brands will highlight a single feature that makes the phone special. Vivo ads highlight sound quality, while Oppo ads tout the camera. This also marks a pivot from Xiaomi, which rarely invests in traditional advertising in China.

These identical strategies are no coincidence. Oppo and Vivo share a common history—both originate from the Guangzhou-based electronics firm BBK. Best known in China for producing a Game Boy-esque console in the early nineties, the company now serves as a holding company that houses Oppo, Vivo, and OnePlus—the global-facing smartphone brand that closely imitates Xiaomi’s e-commerce-centric model.

Oppo, Vivo, and OnePlus executives seldom discuss their relationship openly. Their history has become gossip fodder for gadget lovers and industry experts, both inside (link in Chinese) and outside China. But few can claim to know definitively how funding, profits, and resources are shared. At best, they describe themselves publicly as “brother and sister companies,” or “sharing a common investor.” Often they deny any relationship at all.

That’s almost certainly not the case. Even if each of the three entities operates independently, their overlapping staff and analogous strategies indicate that, at the very least, the companies share an overarching business philosophy. As mysterious as they might appear when viewed together, one thing is clear—the phones are selling.

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