Apple was No. 1 in China in the first quarter. But the company missed iPhone sales expectations in the calendar second quarter and fell to No. 3 behind two cheaper local models made by Xiaomi and China-traded Huawei Technologies, according to research firm IDC. Both use Google's (GOOG - Get Report) Android-based operating system.
A sharp decline in Chinese share prices in June and July dented consumer demand, especially for high-value items such as the iPhone, which sells for the equivalent of $827 in ever price-conscious China.
Chinese-brand smartphones sell for less than half that price but without the perception of quality and social status associated with Apple.
"Now an increasing number of Chinese vendors, like Huawei and Lenovo (LNVGY) , are working to push higher into the mid-range to high-end segment, so Apple will face heavier competition but remains a very popular status symbol brand for those who can afford it," said Mark Natkin, managing director with market research firm Marbridge Consulting in Beijing.
Depreciation in the Chinese yuan in early August, a move that helps domestic exporters and steers later currency fluctuations toward the free market, would add costs to Apple along with those of other foreign firms that import goods to China.
Apple generated $13.2 billion in revenue from China in its fiscal second quarter, up 112% year on year. Last year, Chinese consumers contributed to 16% of Apple revenues.
Adding pressure to Apple's global income, with China no exception, sales of iPads are easing in line with tablets designed by other brands, and the Apple Watch has undersold expectations suggested by industry analysts at the start of the year.
Apple's China struggles are reflected in Nasdaq share prices, which have declined about 12% since July 20. Apple spokespeople declined comment for this report.
The company may strike again at the top spot in China with the widely expected release of its iPhone 6s and 6s Plus at the end of September, said Sean Kao, an IDC research manager in Taipei. Consumers in China, as in other countries, would buy it for the large screen sizes.
But Apple's cheaper rivals are already developing their own lookalikes, duplicating technical advantages of the 6-series hardware and software, analysts say. U.S.-traded peers that are popular in China also include Samsung (SSNLF) and ZTE (ZTCOY) .
"Android OS and Android phones are getting closer to iOS and iPhones," said Richard Robinson, founder of Beijing-based app developer Yolu. "An abundance of impressive, beautiful and powerful phones are on the market, so the whole Android camp has to keep (Apple CEO) Tim Cook up at night both for the China market and globally."