Apple Inc. (AAPL) might have more than one thing standing in its way of achieving a long-anticipated sales super cycle.
Wall Street analysts have warned that organic LED supply constraints could throw a wrench in Apple's ability to experience a super cycle, or a surge in smartphone sales reminiscent of the blockbuster iPhone 6 launch in 2015. Based on the iPhone X's Nov. 3 ship date, that still seems unclear, though it will likely force sales estimates lower for the December quarter. The tech giant could also face an additional setback on top of any production issues -- sluggish iPhone demand in the key China region.
Apple's business seems to keep growing on an annual basis in nearly every corner of the globe except Greater China. In its most recent earnings report, Greater China sales declined 10% annually and slid 25% quarter-over-quarter, marking its sixth consecutive quarter of falling sales in the region. The data is just the foundation of what has been referred to as Apple's China problem, but there may be some greater, underlying issues that explain why the company is having so much trouble there, including growing competition from local smartphone vendors and, similar to the U.S., an aging iPhone owner population that's holding onto older models longer than expected.
In the face of this, many on Wall Street believe the next generation iPhones will serve as a major benchmark for whether Apple can kickstart consumer adoption in China. Apple on Tuesday released three new iPhone models -- the iPhone 8, the iPhone 8 Plus and the 10th generation iPhone X -- as part of its annual September event. The iPhone 8 starts at $699, while the 8 Plus sells for $799. The iPhone X, as it was rumored previously, will sell for $999. Pre-orders for the iPhone X begin Oct. 27 and the device ships by Nov. 3, while the 8/8 Plus can be ordered starting Sept. 15 and will start shipping a week later.
Despite Apple's recently gloomy outlook in China, some analysts remain optimistic about the market opportunity there, believing there's demand among existing iPhone users, as well as new pockets for growth, like potential users who could be stolen away from Android.
But in order for Chinese consumers to be enticed by the new iPhones, they'll have to view their new features as a meaningful upgrade from prior iterations. The iPhone 8 and 8 Plus, while packing some new features, probably won't do the trick. The phones come with a faster processor, better cameras that can handle advanced augmented reality capabilities and wireless charging, as well as a higher price tag. The prices for the iPhone 8 and 8 Plus compare to $649 and $769 for the iPhone 7/7 Plus, respectively. The phone also doesn't look all that different from the iPhone 7 or the iPhone 6.
The iPhone X has considerably more striking features, both aesthetically and with its internal components. It boasts an organic LED, edge-to-edge screen that eliminates the need for a Touch ID, in favor of facial recognition system called Face ID and also includes things like wireless charging. Its base price of $999 sets a new and significantly higher bar for the price of an iPhone, while potentially adding as much as 6% to Apple's bottom line in 2018.
Fortunately for Apple, sticker price isn't always an issue in China. Instead, Apple has to win over Chinese consumers with its advanced technology and by simply making a phone that looks good, if not better than its competitors.
"The aesthetics and uniqueness of the iPhone's design are critical to its success amongst the most influential and wealthiest consumers," said Ben Wood, chief of research for CCS Insight. "These people are critically important as they are often the trendsetters for new tech adoption. The introduction of the iPhone X is the first time we've seen a significantly differentiated design for some time and this will undoubtedly be an instant status symbol, particularly as we expect it to be in very limited supply."
Ahead of Tuesday's event, Morgan Stanley analyst Katy Huberty was bullish on China's reception of the newer iPhone models. "We look for especially strong growth in China where the upgradeable (two year old) iPhone base grew 56% this year and consumers are more sensitive to form factor changes," she said.
Huberty estimates that Apple will see iPhone unit growth of 23% in fiscal 2018, which is 7 points higher than consensus growth estimates.
Still, Apple will need to keep an eye on competing models from Chinese smartphone vendors like Oppo, Vivo and Huawei. Wood noted that Apple is a bit more isolated from those rivals than Samsung (SSNLF) , due to the fact that it operates in the iOS ecosystem, while Samsung relies on Android. That said, local vendors are beginning to adopt more features used in new iPhone models and are releasing the phones around Apple events.
Chinese smartphone company Xiaomi, for example, released the Mi Mix 2 on Monday -- just one day prior to Apple's launch event. Like the iPhone X, the Mi Mix 2 features an edge-to-edge screen, but for almost half the price at $550.
Chinese brands have been growing in scale, with access to the same supply chain, rising components buying power, aggressive marketing and value propositions that have stalled Apple's growth rate and "nullified differentiation points," said Counterpoint Research analyst Neil Shah.
"Apple has its work cut out for it, with 'brand equity' remaining the key differentiator here," Shah explained. "So Apple will have to out-market rivals by taking a sting out of the high price tag of the iPhone X and make users want it more by positioning it like a must have special edition."