Wearables in China, particularly basic bands, now cost well below CNY200 (US$30), leading to low profitability. While fitness trackers have gained more functionality beyond the basics, average selling prices have stalled since the introduction of Xiaomi’s Mi Band. As basic bands have become democratized, wearable band hype has faded. Many companies have left the market, but those left still believe basic bands, or wearables as a whole, have much potential. This report highlights opportunities in the Chinese wearables market and focuses on the direction companies should take in the long term.

Features on fitness trackers are becoming checklist items

Initially, in a bid to stand out from the crowd, local vendors in China hit the wearable band market with additional features, such as displays and heart rate sensors. But these have quickly become checklist items, with vendors not taking account of their effectiveness or the real value that users should be receiving. Yet vendors were still under price pressure as they raced to gain as many users as possible – a strategy popular among Chinese startups where initial investment is poured in to establish a large user base, from which to hopefully derive revenue later on. Without scale, local vendors realized that it is not feasible to continue with such a strategy, and stopped attempting to replicate Xiaomi. According to Canalys’ Q2 2016 shipment estimates, Xiaomi commands nearly half of the wearable band market in China, though all its products are priced under US$50.

Different strategies can be undertaken by different types of vendors

To combat low profitability, vendors need to explore how wearables can help them reach their core targets. Below are different categories of companies that can make good use of wearables: 

  • Smart phone vendors: Recently, the smart phone market in China increased share in the mid-to-high-end segment, for devices priced above CNY2,000 (US$300). Smart phone vendors are trying to avoid price wars and instead focus on increasing ASPs. Middle-class consumers now have high expectations of local vendors and expect them to provide similar products to those from Apple and Samsung. By offering wearable devices, smart phone vendors can potentially improve the user experience by extending some of functionality to the wrist. The Huawei TalkBand B3 is a good example, carrying over a premium brand image while extending the features of a fitness tracker and a Bluetooth headset to users in an attractive package. As wearables are supplementary products, smart phone vendors can capture more value from wearables than vendors who only sell wearables, even though they might never contribute a significant portion of overall revenue or profit.
  • Connected healthcare product vendors: Wearable bands can be integrated into a health product ecosystem, not only for data collection, but also to provide a more comprehensive user experience. Data such as blood pressure, weight and body composition stats, such as fat and skeletal muscle percentages taken from scales and monitors, can provide a better and more meaningful picture beyond only activity and sleep data. But the wearables offered by these companies are mostly similar to the typical fitness trackers on the market. Vendors such as Lifesense and MiLink should take the opportunity to demonstrate their strengths, not only to stand out with seamless integration between products, but to provide a different focus on health-based smart notifications and a deeper layer of insight from correlated data points. To further strengthen these selling points, vendors should clinically validate their products to improve consumer confidence, a challenging move that companies without health or medical backgrounds should nonetheless aim to emulate.
  • Service providers: The usefulness and convenience of ‘tap to pay’ using wearables is obvious, especially in places where the flow of people is high, such as where they board public transport. Shuashua, Lakala and Watchdata are vendors that have added this feature to fitness trackers. As more smart phones now come with NFC and support payment apps, adding credit to such bands is now more convenient with over-the-air top-ups. And the proliferation of NFC payment terminals has also meant that small businesses can take advantage of this. Compatibility with legacy and existing top-up and payment systems used on public transport networks and by businesses is an issue, and vendors need to put in effort to achieve compatibility in different cities. As such, it remains a unique selling point for the aforementioned companies. In future, wearables could take different forms, such as smart badges to identify employees in large office complexes, which would work as key cards for entry as well as payment solutions for in-house cafeterias.

Wearable vendors must do more

Price pressure has the greatest impact on vendors whose core products are only wearables, forcing them to push for continuous product iterations to drive shipments, resulting in very short product cycles. To stay profitable, vendors diversify revenue streams by relying on their platforms to serve ads and services to users. Vendors alone are unable to offer comprehensive services. Manufacturers such as bong, Weloop and others undertook partnership initiatives with different cross-industry companies to provide a variety of services. These vendors faced strong competition from market leader Codoon, which now has 60 million users on its platform. Its mature platform integrates social media, an online shop selling fitness gear, an active online community of users and personal trainers, as well as enterprise health clubs and insurance solutions, all achieved without an active hardware product currently on the market.

Even so, there are still plenty of other opportunities that vendors can pursue. Below are some suggestions that wearable vendors can take to detach themselves from the stigma of low-cost products:

  • Focusing on design, form and function: Typical consumers who use a fitness band, or know about fitness wearables, look for products that are not only fashionable, but also able to provide different functionality. Companies such as Amazfit (a sub-brand of Huami, Xiaomi’s ecosystem partner that manufactures the Mi Band) and Misfit are among the few companies trying to break the conventional mold and create unique designs. Appealing designs can attract new users, but oversimplifying functionality will not convince mass-market consumers to pay for more expensive devices. Chinese consumers are always looking for the latest products. On top of an outstanding design, the next thing that can easily convince buyers is the value and the utility a product can provide.
  • Focusing on niche segments: Niche market products, such as outdoor running GPS watches, command higher ASPs. Vendors such as Garmin and Suunto have a strong foothold in China thanks to their professional GPS watches that track outdoor activities. For local vendors without the necessary experience and know-how, to directly challenge the likes of Garmin and Suunto will not be practical. By improving algorithms and sensors, local companies can start adding more tracking modes as a way to differentiate. Unique tracking capabilities are important and cannot be created quickly. But they will be a lasting unique selling point if done properly.
  • Worldwide expansion: A number of smart phone and feature phone ODMs have found new growth as they expand globally into growing markets, such as Africa, Southeast Asia, the Middle East, and Central and Eastern Europe. Smart phone brands, such as Wiko, Infinix and Tecno, are inspiring local wearable vendors to follow their lead. Expansion into different markets is challenging and requires rigorous work to understand and fulfill different countries’ demands, with localization of services being especially important. It is resource-intensive for most local wearables companies to move outside of China, as vendors need to not only have a mature portfolio, but also to flesh out go-to-market strategies, sales channels and service networks from scratch.

The next natural stage of development is moving from basic bands to smart watches. The functionality of basic bands, such as fitness trackers, will be completely assimilated into smart watches. But to produce a new smart watch, providing a new operating system is especially challenging, as seen by the slow development of YunOS and TencentOS for smart watches. Outside of Apple’s watchOS ecosystem, the Chinese smart watch market is still without a significant platform leader. As of now, basic bands will still enjoy a longer period of growth before smart watches catch up. Many local wearable vendors are waiting for improvements in hardware efficiency, battery life and sensor technology. These improvements will be the catalysts driving vendors to move to more complicated form factors offering more features and better user experiences.

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