‘Transported back to the 2000s’: Russia faces a smartphone shortage as Apple and Samsung exit and Chinese brands retreat
In the past few weeks, Russians have queued up to buy IKEA furniture, replenish Uniqlo basics, and savor McDonald’s, KFC and Starbucks one last time before the companies shutter operations in Russia over the war in Ukraine.
In early March, Apple and Samsung—two of the world’s top smartphone makers—joined the mass corporate exodus, and Russians raced to stockpile imported smartphones and other electronics too. Consumer spending on electronics surged by 40% in the first week of March compared to the February average, according to Russia’s Promsvyazbank.
At least 380 companies had announced their withdrawal from Russia as of March 15 over the country’s invasion of Ukraine, a list that includes international clothing retailers, luxury brands, fast food chains, and energy, banking, legal and consulting firms, according to research by Jeffrey Sonnenfeld, senior associate dean and professor at the Yale School of Management.
Apple announced that it was stopping all product shipments to Russia, citing its “deep concern” over Russia’s actions in Ukraine and “all of the people who are suffering.” Samsung said it’d stop sending products to Russia “due to current geopolitical developments.”.
Apple and Samsung’s absence in Russia will be acutely felt—perhaps more so than the exits of other foreign brands—because of their dominance of the Russian smartphone market and ubiquity in daily life. Together, two companies account for almost half of smartphone volume in Russia, which has the third-highest smartphone adoption rate in the world. Chinese mobile phone makers like Huawei, Xiaomi and Realme have gained in popularity in Russia in recent years and make up the remainder of Russia’s smartphone market. But they too appear to be backpedaling from Russia as they try to acquiesce to Beijing’s official stance of maintaining “normal” trade with Russia while avoiding Western sanctions and the ire of Western European customers. The result, experts say, is a looming smartphone shortage in Russia that no one brand will be able to backfill, a crisis that could cut further isolate a citizenry with few remaining links to the outside world.
Russia is one of the word’s most digitally-connected countries. Over 85% of the Russians used the internet in 2020, compared to 71% in China and 41% in India, according to the World Bank. Around 70% of the Russian population, or 102 million people, own a mobile phone. Russia’s smartphone adoption rate ranks third worldwide, just behind the U.S. and Germany, according to a 2021 report by consumer data firm Newzoo.
Retreating from Russia will barely dent the bottom lines of Apple and Samsung. Apple’s Russia revenues reached $2.5 billion in 2020, accounting for less than 1% of the company’s total global sales of $274.3 billion that year, Daniel Martins, founder of investment firm DM Martins Capital Management, wrote in a March 2 note. Samsung’s Russia revenue in 2020 was approximately $3 billion or 1.5% of its total global sales of $200 billion, according to data from Russian data provider TAdviser.
But the two companies’ exits from Russia will be a shock to the country’s consumers. The exodus will strip Russia of nearly half of its official smartphone supply. Apple and Samsung accounted for 47% of Russia’s smartphone market as measured by shipment volume in 2021, according to data from Counterpoint Research, a smartphone and semiconductor advisory firm.
For Russian consumers, Apple is a status symbol and offers a “tight-knit ecosystem of [Apple] devices that few vendors can compete with,” while Samsung’s array of sleek products at varied price points makes it “one of the main reasons Samsung is Russia’s No. 1 vendor,” says Jan Stryjak, associate director at Counterpoint Research.
Russia is also one of the world’s most expensive places to buy an iPhone. Deutsche Bank research showed that in 2017, Russian consumers paid $1,086 for an iPhone 7 compared to U.S. consumers who paid $815 for the same model. That year, only Brazil and Turkey surpassed Russia in terms of iPhone cost. Import taxes, domestic telecoms firms’ fees, and Apple’s higher sticker price to account for the ruble’s volatility have contributed to the high price of iPhones in Russia.
Samsung has now shut down its physical shops across Russia. Apple didn’t have any in-person shops in the country to begin with. Both companies have stopped selling products via their official online shops in Russia. For now, imported smartphones from Apple and Samsung are still available for purchase in Russia through third-party retailers, but Russian resellers of smartphones like the iPhone and Samsung’s Android-based Galaxy phones have already marked up prices even further due to limited supplies and a weak ruble. Russia’s main Apple resellers like Svyaznoy, re:Store, MTS. and Beeline increased prices for all iPhone 13 models after Russia’s Feb. 24 invasion of Ukraine. An iPhone 13 Pro with 128 GB of memory now costs 149,890 to 149,990 rubles—approximately $1,438 to $1,449 as of Thursday–compared to Apple’s official list price of 99,990 rubles, or $966.
Even with the high prices, Russians are likely to buy up the existing stock of imported smartphones in the next few months—if not weeks—and sellers face the challenge of acquiring new inventory, says Ben Wood, chief analyst and chief marketing officer at CCS Insight, a smartphone-focused technology and internet consultancy.
Russia’s secondary sellers are likely out of luck for the foreseeable future, given that Apple and Samsung have choked off official supply lines. A gray market for iPhones and Samsung Galaxy phones could flourish, but procuring foreign phones through unofficial means is unlikely to be efficient or cost-friendly for retailers or consumers. Russian retailers could potentially obtain foreign smartphones through Central Asia, but this option is “unlikely given the high transport costs of importing goods into the Central Asian republics,” Wood says.
Filling the void
Chinese mobile manufacturers were initially expected to fill the void Samsung and Apple left in Russia. Xiaomi, Huawei spinoff HONOR, Realme, Oppo and Vivo made up 39% of the country’s smartphone market share by shipment volume in 2021.
But Chinese mobile companies are now caught between Beijing’s official stance that China-Russia trade should continue as normal and their booming business in the West—particularly Western Europe—where governments and consumers favor cutting commercial ties with Moscow, says Stryjak. As of the third-quarter of 2021, Xiaomi, Oppo, Realme and Vivo have recorded year-over-year growth in Western Europe of 51%, 112%, 160%, and 238%, respectively, according to Counterpoint Research.
Caught between competing interests, Chinese smartphone makers seem to be taking a “pragmatic [business] approach” to the Russia-Ukraine conflict that undercuts the initial assumption that Chinese companies would capitalize on Apple and Samsung’s exits, Wood says.
According to the Financial Times, Chinese smartphone shipments to Russia have plunged in recent weeks, with popular producers like Xiaomi, Huawei, and Oppo reducing exports to the country by at least half. The companies didn’t immediately respond to Fortune’s requests for comment.
Reducing shipments makes business sense for these companies right now and shouldn’t necessarily be interpreted as a political stance, says Wood. “The ruble is volatile, and it’s nearly impossible [for companies] to know how to price products every day to ensure that they’ll receive payments from Russia enough to cover their own costs,” he says.
Cutting back on smartphone shipments to Russia also alleviates reputational risks to some extent, says Stryjak. Such moves “will look good from the vantage point of Western Europe.”
Less-established smartphone manufacturers are even more unlikely to help plug Russia’s smartphone supply gap, says Shahed Amanullah, global vice president of customer experience at consultancy Frost & Sullivan. Smaller companies need to invest significant time and capital to push into the Russian market, and the risks of entering Russia now outweigh the benefits. “Once the crisis [in Ukraine] abates and the large manufacturers flood back in [to Russia]… the [smaller] players could be pushed right back out,” Amanullah says.
Russian authorities have long pushed for a homegrown alternative to foreign smartphones. In 2013, tech firm Yota Devices, which was backed by state fund Rostec, released the country’s first domestic smartphone called the YotaPhone, which then-Russian Prime Minister Dmitry Medvedev referred to as the “Russian iPhone,” but sales never took off. Yota’s first two smartphones sold only 75,000 units by 2016, according to the FT. By 2019, Yota’s $126 million lawsuit from its Singaporean manufacturer Hi-P had bankrupted the firm.
Now, Moscow’s top domestic contender is the Ayya T1 smartphone, which currently runs on Android but will soon switch to the Aurora operating system. Kremlin officials are urging Russian citizens to use the Ayya phone now, but the device “in no way, matches the quality, features and performance of Apple and Samsung,” Amanullah says.
The combination of Western sanctions, corporate exits and a declining ruble have “created the perfect storm for Russian consumers,” Amanullah says. They “will be left wanting and feeling like they have been transported back to the 2000s,” he says. Russians have become “cornered” and cut off from global producers and markets, and citizens will be relegated to buying the most affordable smartphones that offer only the most basic functions, Wood says.
Even if the flow of smartphones to Russia resumes later this year—if Russia pulls out of Ukraine and business conditions are satisfactory enough for international firms to return—the “damage has been done for Russian consumers,” says Wood.
Russian consumer confidence has dropped rapidly in the past few weeks, declining 7.8% since Feb. 24 to 94.7 points—the lowest level this year, according to Morning Consult, a data and advisory firm. Russia is “headed for a deep recession, and consumers are feeling real pain,” says Jesse Wheeler, a Morning Consult economic analyst. The ruble drop has eroded the purchasing power of ordinary Russians by fueling inflation and driving up the price of imports, he says. The jump in consumer spending in early March—triggered by inflationary fears and a rush to stockpile foreign goods—is likely to abate as prices rise and imported goods become more scarce. Russia’s inflation following the Ukraine invasion has now surged by 4.4%, according to the country’s Federal State Statistics Service.
An in-demand smartphone, like an iPhone from Apple or a Galaxy from Samsung, is now clearly “very costly for the majority of citizens,” Wood says. Even if there are work-arounds to move these products into Russia, most consumers “don’t have the currency capable of paying for [high-priced imported] goods anymore,” he says.
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