Why Apple (AAPL) Needs More Catalysts in China

2015 has been a good year for Apple (AAPL) in China so far. Apple reported April to June quarter revenue from Greater China of $13.23 billion recently, up from $6.23 billion in the prior-year period, translating into a 112% increase. Sales of the iPhone were up 87% in greater China (includes China plus Hong Kong and Taiwan) as compared to 5% overall growth.

However, Apple's overall revenue from China declined 21% between the first and second quarters of 2015.
The second quarter is traditionally weaker for iPhones as consumers wait for the company to introduce a newer version.

As recently as last year, Apple was at number 7 among smartphone makers in China. But, after the launch of iPhone 6, Apple's sales saw an unprecedented rise and it became the most popular smartphone brand in the country through the first quarter of 2015.

However, Apple has lost the top position in the most recent quarter and stands at the number 3 spot in China as of now. Xiaomi commanded 15.9% of the smartphone market in China during the second quarter and regained its leadership position.

Competition and Apple's genuine chance

China is the world's biggest smartphone market and competition is fiercer than ever. Apple, Samsung, and dozens of smaller local vendors are all fighting for a bigger share of this market. Chinese vendors such as Huawei, Xiaomi and Lenovo are putting up a tough fight against the foreign brands as Chinese consumers are buying more phones from home grown vendors.

While they price their phones lower than the iPhone or the Galaxy, they don't compromise on quality or specs anymore. Xiaomi has grown quickly by selling feature-packed Android phones at low costs. It has marketed itself successfully through social channels, building a strong fan base among young Chinese customers, and keeping costs down by selling its phones online.

The iPhone is the most important product for Apple. It now overshadows the rest of Apple's businesses. In the last quarter, it accounted for about 63% of Apple's overall sales, compared to 53% in the year-ago period. It is so popular that Apple has sold iPhones at high prices at a time when smartphone prices are sliding. The average selling price of iPhones rose by more than $100 to $662.42 last quarter. The latest iPhones are especially popular in China. But, like previous iPhone versions, the iPhone 6 and 6 Plus also faced seasonal slowdowns last quarter, falling short of some analysts' estimates.

Over-reliance on the iPhone is not a good thing

This reiterates the fact that every product has a limited lifetime and most of them show seasonality. Thus, Apple needs new products in its portfolio which can keep up the sales momentum when iPhones fail to do so. Apple tried exactly that by introducing the iPad in 2010. But, even that product is showing signs of a slump in sales. Apple's tablet sales have shown a similar trend, falling about 18% in unit terms in the previous quarter, marking a sixth straight quarter of year-over-year declines.

There are signs from the shipment data that the company won't necessarily be able to rely on smartphone sales in the future. China's smartphone market doesn't have much room left to grow. In order to guarantee future growth, the company needs to lay the groundwork to ensure its latest offering -- the Apple Watch -- ultimately succeeds. CEO Tim Cook is in talks with Alibaba and Chinese banks in order to lay out a China strategy for the watch. In an interview with Chinese news agency Xinhua, Cook said he's in talks to partner with the Chinese e-commerce behemoth on mobile payments.
"We very much want to get Apple Pay in China," Cook told Chinese news agency Xinhua. "I'm very bullish on Apple Pay in China."

Apple is in the midst of a transformational cycle, with the first new product category in five years being the Apple Watch. It is also adding newer aspects like the larger form factor to the iPhone, which has helped the company prop up sales. It is also venturing into new areas of innovation (e.g., streaming TV, growing interest in the car), and a rapidly expanding digital world (e.g., Apple Music, Apple Pay, CarPlay, etc.)


But, thus far, Apple has been unable to strike a deal with any of the possible partners in China. Talks that began last year with China's credit card service UnionPay have not yet materialized yet, and the tech giant has little to show so far from its negotiations with Chinese banks. Also, nothing concrete has been said by Cook or Alibaba's Jack Ma about their partnership. Overcoming these challenges is imperative for Apple to progress further in China, or else the company might lose ground to cheaper and stronger alternatives in this market.
Published on Aug 11, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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