Will Chinese Carriers’ Smartphone Subsidy Cuts Hurt Apple and Samsung?

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Recently implemented changes in China’s smartphone market could have a dramatic impact on the sales of high-end devices made by Apple (NASDAQ:AAPL) and Samsung (SSNLF.PK). Earlier this year, China’s government urged the country’s three largest telecommunications companies to reduce their sales and marketing costs, including the subsidies that make high-end smartphones more affordable for many of the country’s less wealthy consumers. According to unnamed sources cited by Bloomberg, China Mobile, China Unicom, and China Telecom were told to slash costs by a combined total of $6.4 billion over the next three years.

China Mobile, the world’s largest carrier, with more than 793 million subscribers as of the end of July, was the first to announce its subsidy cuts earlier this month. Bloomberg reports that China Mobile will reduce smartphone subsidies by about $2 billion this year. The country’s second-largest carrier, China Unicom, also announced it would reduce costs this year, while China Telecom is expected to reveal the extent of its subsidy cuts when it reports its earnings results later this month. The subsidy reductions will make flagship devices from Apple and Samsung more expensive while benefitting domestic smartphone makers like Xiaomi.

Xiaomi has already seen spectacular growth in China due to its no-frills, Internet-based approach to selling its devices, which has allowed it to offer smartphones with high technical specifications at much lower prices than many of the devices sold by Apple and Samsung. In the first quarter of 2014, Xiaomi overtook Apple to become a top three vendor in China for the first time, according to market research firm Canalys. By the second quarter of 2014, Xiaomi had also overtaken Samsung to become China’s top smartphone vendor with a 14 percent market share after year-over-year growth of 240 percent.