Apple CEO Tim Cook’s letter to investors certainly has come as a surprise, admitting as it did that global sales are weak and that revenue is likely to be $5 billion less than originally projected.
By pointing out that the company’s sales in China are declining and by providing the financial proof that the company has failed to localize effectively, the letter served up even more material to Apple bears.
Clearly, Apple is facing a dire situation—but not for the reasons many people assume. Contrary to what’s widely cited as a reason, including from Cook himself, Apple’s hard time in China is not because of the trade war that’s raging between the US and China. Instead, the company’s woes have been a long time coming.
Cook, and many outside of China, have placed too much emphasis on the trade war for the decline in sales. In the Apple letter and in recent media interviews, Cook blamed the trade war for having a negative impact on China’s economy, and linked this macroeconomic situation to the fall in sales in the market. But this fails to consider the real situation in China’s smartphone market.
The Chinese smartphone market is mature and saturated. To date, most of the growth has come from first-time smartphone buyers. As more Chinese people get onto the mobile internet, and phone quality improves, the total number of purchases will inevitably decline as new purchases and replacement rates decline as well.
There are also so many options on the market. While globally, Apple and Samsung continue to lead (third and first respectively with Huawei coming in second), the amount of competition in China has grown exponentially. And we’re not just talking about budget phones either. Every serious smartphone player, including Huawei, Xiaomi, Oppo, and Vivo, have released their own mid-range and high-end phones.
Apple is no longer the status symbol it used to be in China. Having the latest iPhone is still a big deal and can certainly engender status envy where “keeping up with the Joneses” is still a thing, but Apple products in general have become more ubiquitous. This demonstrates not only Apple’s success in the market, but also the increasing affordability (yes, you heard me right) and ease of access.
As I pointed out in 2017, Apple has not done a good job responding to local expectations. While the US and EU markets may be similar, the China market is full of locally developed hardware and software that do a really good job of solving Chinese pain points.
China also has a thriving second-hand market, not only for used products, but also refurbished electronics and battery replacements, which Cook did mention in the letter.
In addition, the country has a thriving installment-finance market. Almost all the fintech IPOs we saw this past year were companies who built their business on the “not-quite-affluent-but-want-to-spend-like-I-am” set.
Apple has faced these headwinds for some time—even before the current tension over trade. As much as the leaders of both countries would like to take responsibility for such dramatic changes, this just isn’t the case.
That doesn’t mean, however, that the trade war won’t play an increasing role in their declining sales in China. Apple’s American citizenship is now a hindrance. Previously, the Chinese fetish for foreign products helped push Apple to its success, but now the trade war and domestic political situation is beginning to turn people away from American brands in favor of Chinese ones.
Chinese smartphones, for example, not only provide services Chinese consumers now expect, but also produce models of similar build quality to Apple’s at a fraction of the price.
Still, if Apple hopes to reverse its fortunes in China, Cook and senior management need to face up to an uncomfortable reality—that they’ve dropped the ball in China and failed to localize fast enough. Getting it back may be harder than they, and investors, could imagine.