Global Economic Uncertainty and the Chip Shortage Continues to Hinder the Consumer SIM Card Market

It has been well documented that the semiconductor industry is currently going through a high level of uncertainty. Post COVID-19, the telecoms industry continues to contend with an array of related market impacts in 2022, most notably, continued supply chain issues, further impacted by sporadic and continued lockdowns in China, alongside the chipset shortage and increasing chipset Average Selling Prices (ASPs).  Despite these ongoing challenging conditions, new macroeconomic and geopolitical factors are adding fuel to the fire, further exacerbating and straining a market already under significant pressure.

Newer issues related to increasing energy prices, driving up inflation and placing significant pressure on consumer spending is a trend set to continue throughout 2022, into 2023, and possibly beyond. Central banks are reacting in a bid to curb rising costs by increasing interest base rates in a bid to slow down or reverse inflation. A lot of economists are now pointing toward inevitable recessions, with inflation and nominal levels of economic growth not likely to return until approximately 2025.

Today, there seems to be no end to the challenges that lie ahead. Despite strategizing and coming to grips with COVID-19-related impacts, they continue to linger. Dealing with existing and continuous COVID-19 challenges remains a significant ecosystem pain point, but at the same time, new macroeconomic and political impacts are creating additional market challenges.

For the Subscriber Identity Module (SIM) card market, several market challenges remain. Some of the existing challenges are related to increased chip costs and supply constraints, while others on the horizon are mainly linked to macroeconomic conditions, subsequently driving up inflation and talk of looming recessions.

With inflation on the rise, consumer spending is ultimately expected to decrease. In turn, this will have a direct knock-on effect on handset shipments, as consumers look to cut spending and will not renew handsets as regularly. In addition, ABI Research is hearing reports of significant handset inventory buildup by some of the leading smartphone manufacturers. The expectation is that smartphone Original Equipment Manufacturers (OEMs) will want to deplete existing inventory, prior to replenishing stock, so they may delay the launch of new handsets, although this is not a scenario we have yet seen, with Apple going ahead with its Apple 14 launch of devices as typically scheduled. Any reduction in handset shipments will directly impact traditional SIM card and Embedded SIM (eSIM) shipments. Lower handset shipments will ultimately mean lower SIM shipments.

The impacts on consumer spending, in addition to the chipset shortage, continue to present significant market challenges as foundries place capacity focus on higher-margin chip solutions, a category under which the traditional removable SIM card does not fall. With supply becoming increasingly limited, production is shifting toward higher-value chipset propositions. Already, the removable SIM card supply is down approximately 5% Year-over-Year (YoY), but heading toward the end of 2022 and into 2023, this percentage is at risk of increasing significantly, which could make it difficult for Mobile Network Operators (MNOs) to onboard new customers and/or upgrade to new connectivity packages.

Overall, ABI Research expects that SIM deployments into handsets will plateau in 2023, achieving extremely low levels of YoY growth, reflective of a market whereby supply constraints continue to be a hinderance, accompanied by the impacts related to rising inflation and a subsequent reduction in consumer spending. At best, the market for 2023 will largely mirror that achieved in 2022.

Myriad challenges make it increasingly difficult to create a meaningful strategy to help mitigate any potential market impact. However, a combination of technology and digitization will place MNOs in the best possible position to help them ride out the storm. A digital-first approach, using eSIM as the enabling technology can help mitigate impacts if the traditional SIM card supply is further strained and provide a platform from which profiles can be digitally loaded and/or changed. Whenever possible, new MNO connections should use the eSIM, with new customers offered eSIM activation as applicable. This will help reduce the likelihood of an MNO not being able to replace or supply a removable SIM card and reduce market strain. eSIM is the market future, which was made abundantly clear after Apple’s 4Q 2022 eSIM-only iPhone 14 range of devices for the U.S. market was launched.

With eSIM usage forecast to increase within the consumer market, some MNOs continue to question the potential impacts eSIM use may have on MNO churn. At this stage, ABI Research does not foresee a major threat to MNO consumer stickiness. After all, the postpaid market remains heavily MNO subsidized, resulting in the ability for consumers to spread the cost of devices over long contract periods; subsequently, eSIM is unlikely to disrupt this cycle.

The larger threat remains on the prepaid side of the market. Users who currently purchase prepaid SIM cards will spend the credit purchased prior to purchasing another. It is feasible to assume that this cycle will remain largely unchanged, as users will not look to other MNO deals until prepaid credit has been used up. The difference will be the form factor and the fact that a prepaid user can switch to a new prepaid deal digitally, rather than physically. Ultimately, increased customer churn should not be a perceived eSIM threat, as it will ultimately be MNO product and marketing strategies that define retention rates and attract new customers.

In summary, MNOs should not view the eSIM as a threat that results in increased operator churn. MNO churn will be defined by MNO retention strategies, customer service, reliability, quality of service, and the personalization of services, not the enabling technology in question.