Wall Street darling Apple had some bad news for investors in July as it reported 15 percent lower revenue and 27 percent lower profit as compared with a year ago. Many of the company’s new products such as the iPhone and the iPad are not selling as well as the firm had hoped, particularly in China, Apple’s second-largest (and potentially — one day, its largest) market.
Overall, iPhone sales — which make up about two-thirds of the company’s revenue — were down by some 2 million units globally, a decrease of 15 percent. For the most recent quarter, Chinese iPhone sales figures were down 33 percent from last year.
According to Apple CEO Tim Cook, this was due in part to currency fluctuations, and he claimed that real sales quantities from the Chinese mainland had actually fallen by only 2 percent in the most recent quarter. In the last quarter of 2015, 27 percent of Apple’s global revenue came from the world’s most populous country.
Apple has been in China in a big way since 2008, when it opened its first retail location in Beijing. Since then, 40 more stores have followed, in locations as diverse as Fuzhou, Wuxi and Jinan.
In Hong Kong alone, there are five stores, with the latest in the New Town Plaza shopping mall a showcase for the company’s continuing tradition of striking exterior designs that transcend their category to become one-of-a-kind shopping and tourist destinations.
But in China, Apple has lately faced stiff competition from native brands such as Huawei, Xiaomi and Oppo as the popularity of local companies’ smartphones has taken off due to a number of factors — lower prices, an OS designed for the native language and less of a premium placed on interface as a primary reason for the phone’s purchase.
The high cost of Apple’s products relative to the average salary in China has been one factor that’s kept the company’s otherwise-impressive success in the country from being even bigger.
For the average Chinese worker, a US$650 iPhone is often the equivalent of a month’s salary, an expense that slightly more people were willing to make several years ago, when the mystique of the American brand and its products was more of a novelty in the Asian country.
Some say the smartphone market in China is now saturated as 90 percent or more of buyers who can afford them have purchased one, meaning that new sales will be almost exclusively be upgrades, rather than initial purchases. For many citizens, smartphones are still unjustifiable luxuries, costing a minimum of the equivalent of US$50.
As Huawei, Xiaomi, Oppo and Korean giant Samsung get the hang of copying Apple features (while incorporating higher-tech features at lower price points than Apple’s premium models), iphones have fallen to fifth place in popularity in China, taking a mere 11 percent of the market. In fact, of the top 10 smartphone brands in the People’s Republic at the moment, only Apple and Samsung aren’t Chinese.
Rumors that the iPhone 7, due in September, will have virtually the same form factor and case as its previous iteration — even if its features under the hood have been upgraded — have disappointed Apple enthusiasts, and fans in China are no different.
One can argue that Apple’s use of gold and pink tones in its new product casings was an attempt to satisfy the tastes of Chinese and other foreign buyers, rather than those of U.S. customers. For Asian consumers who appreciate rapid technological advances and the avant-garde styling — if only as they relate to products’ exterior appearances — Apple’s slow pace of change is frustrating.
It’s true that the famous computer maker has always marched to the beat of its own drum, particularly when the drummer was former CEO and co-founder Steve Jobs. But now that Jobs has been gone from the business for five years, the firm’s culture under new CEO Tim Cook has tried with middling success to carry forward its legacy traditions and culture even as the business has embraced new global markets.
As the gold and pink casings for its recent phones and tablets have shown, it’s a delicate balancing act for Apple — trying to maintain the mythology of its roots while attempting to please new customers in diverse markets as the company seeks to continue its unprecedented streak of growth. Apple has been the most valuable or second most valuable company in the world by market capitalization for the last two years running.
As the firm attempts to aggressively penetrate still more territories and develop prototypes of surprising new products, Apple risks spreading itself too thin and making the mistake of believing the future will essentially be the same as the past in terms of its products’ appeal and customer types.
Tim Cook has made a very public push to attempt to duplicate the company’s early Chinese success in India, meeting with the country’s prime minister Narendra Modi in an effort to legalize Apple’s proposed retail outlets on the subcontinent. (Apple’s stores were previously barred due to government regulations demanding that foreign manufacturers produce at least a portion of their products in India.)
There’s also been an all-but-undisguised attempt at producing a self-driving car, to compete with the likes of Tesla and Google, both of which are hard at work on their own versions of the potentially huge-selling product.
It’s a big tent to watch over, and some analysts have questioned whether Cook is up to the job. But given the absence of late company showman and visionary Jobs, Cook may be all Apple has in terms of leadership that’s able to come close.
The company’s R&D prototypes of new gadgets like the iPhone 8 and a new wearable health monitoring device are said to be more impressive than this year’s lackluster lineup of new product models. But whether those prototypes will still be considered as innovative a year or more from now is a valid question.
Recently, Apple committed to opening new research centers in Israel, Japan and — surprise — China. Its research budget is a healthy 8 billion dollars, a multiple of as much as 7 to 8 over many of its smaller Chinese competitors.
Apple has always dominated in terms of interface, but now the company is awakening to the realization that external looks matter just as much to the world outside the U.S. as internal functionality. How this will play out with the company’s stock price over the next two years will be interesting to watch.
Regards,
Ethan Warrick
Editor
Wealth Authority
