Chinese sales were a soft spot in what was generally a solid December quarter for Apple (AAPL) . And new sales estimates shine a light on the extent to which tough competition from local smartphone makers have become a headache for the tech giant.
Moreover, considering that Apple still appears to be doing much better in China than any overseas rival, the numbers raise questions about how competitive foreign Android players will be going forward in the biggest smartphone market in the world.
Research firm IDC estimates Chinese smartphone shipments grew 19% annually in the fourth quarter, and 9% for the whole of 2016. Local firms Oppo, Huawei, Vivo and Xiaomi were ranked, respectively, #1, #2, #3 and #5 for both time periods; with Oppo's 16.8% 2016 share good enough for first place, it's safe to say the market is quite competitive.
For its part, Apple came in fourth place during both time periods. IDC thinks the company had an 11% fourth quarter unit share on 14.9 million shipments, and a 9.6% 2016 share on 44.9 million shipments. Those shares are respectively down from 15% and 13.6% in the year-ago periods. Notably, Chinese iPhone shipments are believed to have dropped 12.8% last quarter in spite of the iPhone 7 launch.
On a revenue basis, Apple's Chinese share might still be north of 25%, given the iPhone's steep average selling price (ASP). Apple's global iPhone ASP was $695 last quarter, up $8 annually thanks to strong demand for the iPhone 7-Plus, which features a $769 starting price.
iPhone still lighting it up in China?
For its part, Apple reported mainland Chinese revenue was flat last quarter, and up 6% when adjusted for currency swings. That's certainly better than IDC's iPhone shipment growth estimate, but double-digit Chinese iPad and MacBook growth had something to do with this.
And so did strong App Store growth; Apple's global App Store revenue rose 43% over the first 13 weeks of the quarter, and research firm App Annie believes the store's Chinese publisher revenue more than doubled to over $2 billion.
Throw in the revenue impact of strong iPhone ASPs remarks from Tim Cook indicating Apple's Chinese growth rate wouldn't be "dramatically different" in the March quarter relative to the December quarter, and it's pretty clear that local competition is weighing on Apple's Chinese iPhone shipments. For Samsung (SSNLF) and other foreign Android OEMs, which can't differentiate via software and services to the extent that Apple can, the pressure appears to be even greater.
The fact many Chinese phone sales involve full up-front payments can benefit local vendors selling relatively cheaper hardware. So can the fact that a given iPhone model tends to cost more in China than in other locales due to taxes, and that a strong dollar has forced Apple to hike prices on a local-currency basis. The iPhone 7 starts at $809 in China, or typically over $100 more than in the U.S. even after factoring U.S. sales taxes. The iPhone 7-Plus starts at $959.
And one can't overlook the fact that Chinese OEMs have made tremendous strides in developing phones that feature high-end specs and quality materials, while undercutting Apple and Samsung's pricing. Huawei's Mate 9, Xiaomi's Mi 5 and the OnePlus 3 are some noteworthy examples.
An Apple store in China
An October note from UBS indicated Apple's Chinese iPhone loyalty rate slipped to about 55% in the September quarter, even as its global loyalty rate remained above 70%. That figure may have risen in the December quarter thanks to the iPhone 7 launch, but is still troubling.
Going forward, there's also a risk that a trade war could hurt Apple, given President Trump's promise to pursue tougher trade policies with China and his efforts to get Apple to move more of its manufacturing operations to the U.S. There's a risk of both retaliatory measures from Beijing that could affect Apple, as well as a public backlash against U.S. brands.
Apple still has a lot going for it in China. The company remains a premium, aspirational, luxury brand within the country, and the growth of China's middle class will steadily increase the number of Chinese that can afford an iPhone. And this fall's rumored launch of an iPhone 8 with a 5.8-inch curved OLED display and wireless charging support could be well-received.
Moreover, for investors, it's revenue/profit growth that matters rather than shipment growth. Higher ASPs and the App Store's momentum could allow Apple's Chinese iPhone-related revenue growth to remain soundly above its shipment growth.
All the same, China no longer looks like the glistening growth story for Apple that it did when iPhone 6 sales were booming. It might now be up to the iPhone 8 to return some of that story's luster.