Bottom line: Skidding sales in China's oversaturated smartphone market are long overdue, and could claim Gionee as a first major victim by year-end.

The inevitable is finally happening, and China is showing signs of smartphone burnout. The latest government data is showing that first-quarter smartphone sales in China plunged 26 percent, which is one of the largest drops I can ever recall. In this case we can't really blamed the usual seasonal effect, since this is a quarterly number that includes both January and February -- the two months when Lunar New Year falls.

At the same time, separate reports are citing a top executive at second-tier smartphone maker Gionee shooting down rumors that his company may not pay some of its suppliers due to funding shortages. This comes just weeks after the company made mass layoffs at a major production facility in the southern city of Dongguan, and is one of the stronger signals of distress I've seen from China's bumper crop of second-tier smartphone makers.

The broader theme is that China's smartphone industry has been in dire need of consolidation for the last two years now, but for some reason nothing major has happened up until now. Most of these companies were feasting off a home market that saw strong growth for several years, before starting to fall off a cliff last year. The market contracted 4.9 percent for all of 2017, with the trend accelerating to a 15.7 percent drop in the fourth quarter, according to IDC.

Against that backdrop, this relatively dramatic 26 percent drop in the first quarter isn't all that surprising, though it certainly doesn't bode well for anyone dependent on the market for a big chunk of their sales.  Gionee certainly falls into that category, as the company gets about 90 percent of its sales from China at the moment.

All that said, let's zoom in quickly on the latest news that has one of the research institutes under the telecoms regulator announcing that China's smartphone sales tumbled 26 percent in the first quarter to 87 million units. (Chinese article) That's well below the 100 million in quarterly sales we had seen in headier times. What's more, the trend seems to be accelerating slightly, since sales for March were down about 28 percent.

Long Time Coming

This kind of correction has been a long time coming, as just about everyone and their mother now owns a smartphone in China due to the pervasiveness of models that sell for $100 or less. Such low-end specialists are probably taking the brunt of this downturn, since the few number of people who are buying new models are probably trading up to pricier models, which should benefit more upscale names like Apple (Nasdaq: AAPL) and Huawei.

One company that's clearly getting caught up in this squeeze is Gionee, which just a couple of weeks ago fessed up that it was making mass layoffs at one of its main plants in Dongguan. (English article) The company in January admitted it was in the midst of a financial crisis, and the latest headlines show that its suppliers are clearly worried about getting paid.

Those reports say both suppliers and advertising partners are hassling the company to get paid, prompting vice president Yu Lei to issue a statement on his microblog. That statement acknowledges that Gionee hasn't paid some of its advertising partners recently, but says all its creditors will be repaid. He also notes this isn't the first time the company has gone through a crisis, though he doesn't specify any other particular instances.

We've seen a few other trouble signals emerge from time to time from even smaller names like OnePlus, and most recently Coolpad (HKEx: 2369) has reported massive losses as well. But Gionee seems to be one of the few cases I can recall where a relatively major player has made significant cuts and is experiencing what looks like a run on its finances by creditors. The only other case where we saw similar nervousness so far was with the troubled LeEco, though that company had other issues and its smartphones were never a major business to start with.

It's obviously too early to predict a collapse of Gionee, and it's also quite possible the company could find more money from a new investor. But its slipping share in the China market, followed by layoffs and now signs of unease at its business partners, certainly aren't good signs. Accordingly, if I were a betting man, I would probably forecast the chances are better than 50 percent the company will either be forced to close or get acquired by a larger rival before the end of the year.