Apple’s Decline in China is an Omen of Wider Problems

The warnings were clear when CEO Tim Cook released a letter to investors on January 2, 2019, revising Apple’s Q1 guidance projections to reflect a stagnating hardware business, especially in China. The revenue estimate was lowered to approximately $84 billion from the previously expected range of $89-$93 billion.

Cook blamed the underwhelming performance on macroeconomic conditions, particularly in Greater China, writing in his letter to investors, “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.” Cook then continued to cite some of the macroeconomic statistics portraying China’s slowing economy, writing, “The government-reported GDP growth during the September quarter was the second lowest in the last 25 years.”

In addition, Cook believes that the current trade war between the United States and China adversely impacted the foot traffic in retail stores and with channel partners. He also pointed to a stagnating Chinese smartphone market more generally, writing, “the contraction in Greater China’s smartphone market has been particularly sharp. It is true that China’s smartphone market experienced a difficult 2018, as Reuters reported that total shipments were down 17 percent year-on-year. It should be noted that United States rhetoric during the trade war, especially with regard to Chinese telecom giant Huawei has created a nationalist backdrop to the tech competition between the two countries. This nationalist sentiment can manifest in some consumers in China willingly switching from Apple to Huawei in an effort to support the Chinese company they see as being unfairly targeted by the United States.

SEE ALSO: Apple Has Created Over 5 Million Jobs In China

However, Huawei had a 23 percent increase in shipments in Q4 2018 against a 9.7 percent slump in overall industry shipments. This evidence casts some doubt on Tim Cook’s assertion that macroeconomic conditions played a large role in Apple’s recent downturn in China. While the economic conditions may not have been conducive to market share expansion, other players in the smartphone market seem to have found ways to adapt.

Given the same macroeconomic environment, domestic smartphone producers like Huawei, OPPO, Xiaomi and OnePlus, did not see such reductions in revenue. For example, during Q1 2019 Xiaomi saw its revenue grow by 27.2 percent year-on-year, with its smartphone segment specifically growing 16.2 percent compared to the corresponding period in 2018. Meanwhile, Apple’s revenue was down 5 percent year-on-year.

Apple’s flagship product, the iPhone, has specifically struggled in the Chinese market. The iPhone XR, the more affordable version of the latest line of iPhones designed for middle market appeal, has been particularly disappointing. With a base retail price of 6,499 yuan ($947), the XR lacks the innovative features to command the high price point. For instance, the Huawei Mate 20 X, costing $728, has a four-camera module that promises superior photo quality. The Oppo Find X, also priced at $728, is built with a sliding and bezel-less screen that can elevate the top portion of the phone when one uses the camera. The iPhone is no longer a groundbreaking product that is miles ahead of the competition. Especially in a market like China, with competent and tenacious local competitors, Apple will need to find new ways drive revenue with the latest iPhone release not commanding the same level of engagement as it has previously. A report from Counterpoint research shows Apple’s declining market share back in 2018, and this a trend that is likely to continue. Domestic producers like Huawei have managed to innovate their hardware, with the introduction of foldable smartphone tablet hybrids. These types of devices are primed for mass adoption with advent of cloud gaming made possible by the establishment of 5G networks.

Recently, Tim Cook has tried to offset the underperformance of Apple’s hardware segment by focusing on revenue records in Services. Apple has built its trillion dollar valuation on the back of revolutionary hardware successes, and the transition to software and services will prove much more difficult, especially in China.

For example, Apple’s ability to create a software and service ecosystem in markets like the United States, reinforces the stickiness of their brand. iMessage is Apple specific service, that requires an iPhone and holds great value to users in the United States. However, given the ubiquity of WeChat in China, iMessage simply isn’t valuable in the Chinese market. Users can log onto WeChat from various devices, whether they operate on Android or iOS.

Apple’s services also are not well suited to to China due to the lack of localization that third party, domestic service providers offer. For example, Apple Music priced at $9.99/month as Apple’s direct competitor to Spotify in Western markets, simply isn’t competitive with more localized and cheaper services like QQ Music, priced at under $2/month or NetEase music at $1.20/month. Not only do these domestically produced services cost significantly less, but they are localized for Chinese users, and already boast significant social features within a vast and mature user base.

Apple’s attempts to break into the content streaming market have been cautious so far, but there is nothing to suggest that these services will make a dent in the saturated online content market in China, dominated by services like iQiyi, Youku, Douyin and others.

Apple’s attempt to break into the mobile payments sector has been lackluster. The prospect of Apple Pay gaining any significant market share in China’s robust and developed mobile payment sector dominated by Alipay and WeChat Pay is slim to none. Apple News doesn’t boast the same powerful AI recommendation engines as ByteDance’s Jinri Toutiao, or the same extensive user base as Tencent’s Tencent News.

Overall Apple’s future prospects in China do not look promising. With declining influence and revenue from the world’s most powerful consumer market, Apple will have to reevaluate its strategy, and rediscover the innovation that once made it far and away the leading consumer technology company in the world. While it retains that title for now, the competitive landscape is only going to become tougher.

Irrespective of the Chinese market, Apple has also struggled in the world’s fastest growing smartphone market, India. A country where smartphone penetration is growing at unprecedented rates should present a massive opportunity for Apple to resurrect their smartphone sales volume. However, the Indian smartphone market has gone from around 80 million in 2014 when Apple shipped 1.5 million, to nearly 150 million in 2018 while Apple still only shipped around 1.6-1.7 million, according to Counterpoint. In addition to underperforming in terms of total volume of smartphones shipped, Apple is losing ground premium smartphone segment in India, to Chinese competitor OnePlus. OnePlus’ smartphones are currently the second most popular in India‘s premium smartphone segment, following the company’s OnePlus 6T’s success as India’s top smartphone overall. While Indian consumers are not equipped with the purchasing power of more developed Western economies, Apple needs to devise a strategy to succeed in the world’s fastest growing smartphone market. India also presents serious challenges in the services department similar to China. Indian consumers will be more price sensitive for services, and also have serious localization requirements with a diverse language landscape encompasses many local dialects.

SEE ALSO: OnePlus Becomes No. 1 Premium Smartphone Brand in India, Surpassing Samsung and Apple

In order to resurrect Apple’s success of the past, they must create a strategy to succeed in these two massively important emerging economies, and also innovate their hardware to stay ahead of an increasingly competitive landscape.