Globally, Apple’s iPhone 7 was the best-selling phone in Q1 2017, with 21.5m units shipped, which led to the capture of a 6% market share worldwide. Yet, after losing ground in China – Apple’s third operating segment by revenue – to home-grown brands such as Huawei in 2016, Apple has lost a further 1.8% of the Chinese market, for a total of 26.7% year-on-year from 2016 Q1. This led to Apple experiencing five quarters of year-on-year declines in revenues in China. Huawei is now China’s market leader in terms of smartphone shipments, having sent out 20.8 million units in Q1 2017, giving it a market share of 19.7%.
Could the announcement of the new iPhone 8 change the tale or is there more at play?
Goldman Sachs expects Apple to launch three new phones, including the 8, in September, also suggesting that the phone will account for 58% of Apple’s total smartphone sales for the first four quarters after launch, leading to a forecasted increase revenue of $11bn, to $275.1bn.
The China Story
Industry tracker IDC reported that in recent months, smartphone shipments in China have been fuelled by lower-priced phones rather than premium phones. While Apple’s share of the worldwide smartphone market fell to 14.9% from 15.4% year-over-year in the first quarter, Chinese domestics climbed. Huawei’s grew to 9.8%, OPPO’s increased to 7.4% and Vivo’s claimed a total of 5.2%. One could argue that consumers are pausing for the next iteration of the iPhone, tied to the 10th anniversary of the release of the first iPhone, leading to lower sales. IDC expects more affordable phones to continue to drive demand.
However, if this is the case, the short-term lull is making Apple a victim of its own release cycle, something that could harm share price if the next iteration of the iPhone is delayed. Usually, Apple faces lower numbers in Q4 due to this expected release, with purchases rising in the lead up to the end of the calendar year and the Lunar New Year Festival.
On the other hand, IDC also noted that the success of the Chinese firms is through the sale of mid-priced ($300 to $400) phones. This could also contribute to the lower numbers that Apple is seeing, particularly since these firms are renowned for making high-spec devices at more affordable and lower prices through a network of stores across China. As a result, these upstarts present a key challenge to Apple.
The Big Expansion
Furthermore, the Chinese companies have been increasing expenditure on aggressively marketing their phones as better tech for lower prices, attempting to garner greater customer attention through opening retail stores and improving customer service. Counterpoint Research indicates that 40% of smartphone sales in China are through the store network in physical outlets. As a result, it is not surprising to see these companies actively increasing their physical presence to soak up a bigger share.
For instance, in 2016, Huawei had 35,000 retail stores globally a year ago and proceeded to open a further 15,000, with 11,000 on the Chinese mainland. Additionally, OPPO’s phones are backed by a network of 200,000 locations in China. Undoubtedly, this helped OPPO to see a 122.2% year-on-year growth of smartphones in China, more than doubling its market share (to 16.8%). Comparatively, Apple had just 40 stores on the Chinese mainland. By being selective in its approach to opening its store ecosystem, Apple is limiting its exposure to 40% of the phone sales.
Whilst one can argue that Apple’s brand carries a heavy reputation, and thus low store numbers are not too much of hindrance, the ubiquitous presence of affordable, high-spec alternatives that can compete, both financially and on a tech level, will erode the brand’s power. Therefore, Apple needs a new strategy to tackle sales in China, and the introduction of the iPhone 8 could breathe fresh life into China. Apple’s physical store space in China is dwarfed by that of its Chinese competitors, thus whether Apple undertakes a spending spree to open stores or licenses sales at retailers for a fee, Apple needs to take steps to increase presence in its third largest operating segment.
WeChat – iOS’s Rival?
However, low physical presence is not Apple’s only concern. A further challenge manifests itself in the digital space, presenting a rather unique obstacle. Compared to western phone users, who tend to be smitten with either iOS or Android, smartphone users in China are more likely to be ‘platform agnostic.’ Rather than religiously seeking to remain on one platform as opposed to the other, an app called WeChat is captivating their attention, and it is available on both mobile platforms.
Why is this a challenge?
Apple uses its own operating software, the system that enables the phone to work, as compared to Android that is used on Samsung’s, Google’s and LG’s phones, for example. By using iOS, Apple ensures that there is a consistent standard across all its products, providing a seamless user experience. Thus, users tend to want to stay in that iOS sphere. This ensures a consistent series of purchases, and this is why WeChat is a threat.
WeChat (developed by Chinese giant Tencent) is, for all intents and purposes, an App that can be used on either platform, iOS or Android. To term it a messaging App is to do it a great injustice as it “serves as a one-stop-shop for everything from reading news and booking taxis to ordering takeaways and making payments. Half the users spend more than 90 minutes a day on its chat app, according to WeChat.” It facilitates business through using payment system WeChat Pay, a rival to Apple Pay, integrating subscription services, as well as allowing other applications such a language learning apps and using Official Accounts, allowing users to publish content to subscribers. However, what is truly exceptional is the user count. Across all operating systems, including IOS and Android, WeChat counted 889.3 million monthly active users as of the end of 2016.
If you require a new phone and want to use iOS, you must buy an iPhone. Every aspect of one’s life can be conducted entirely through WeChat, and this is the case for almost 900 million Chinese users. Thus, the most important requirement for a phone is its ability to run WeChat, not the phone’s own operating software. As it can run across operating systems, there is no penalty for switching between iOS and Android, for example, for the Chinese user.
Due to this, Apple’s strength through its IOS monopoly is eroded in China. Outside of China, the iOS-specific user experience, from music licenses to purchased apps, deters one from switching. However, in China, that is not the case as WeChat is the focal point of the smartphone, therefore, rendering Apple in a weaker position. Whilst the company is still sought-after for the luxury brand, the competing Chinese Domestic companies are hot on Apple’s trail.
Competition Moving in
Adding to this mounting pressure is Tencent’s move to develop more ‘mini-apps’ for WeChat, potentially eroding more of iOS and Android market shares. By increasing the App offerings in WeChat, Tencent is absorbing more usage time and therefore increasing advertising exposure. Tencent’s advertising revenue alone was responsible for a reported 58% rise in quarterly profit (Q1 2017), aided by growth in online games, payment-related services and advertising.
The more offerings that WeChat has, the more power it possesses, reducing the importance of the Android/iOS distinction.
Furthermore, the development plans are central to Tencent’s vision of an expansive and dynamic app ecosystem, including WeChat’s own payment infrastructure. TenPay, which runs WeChat Pay and Tencent’s smaller QQ Wallet, is China’s most popular mobile payment provider by users, with 838 million users dwarfing Alipay’s 432 million, according to Analysys.
Withal, one can argue that WeChat is an ‘alternative to the operating system,’ combining several unique features, including a digital pay feature. With this in mind, Apple’s iOS strategy and premium smartphone style are losing power in China. Gradually, iOS exclusive apps will no longer be an advantage as WeChat diversifies its app ecosystem.
Globally, while Chinese vendors are enjoying growth in places like Europe, the Americas still remain dominated by Apple (39%), Samsung (30%), and LG (12%). However, Apple is under threat in China from domestic companies that offer viable alternatives, through a network of physical locations that dwarf Apple’s total physical presence. Combined with WeChat, these alternatives are draining the iOS toting phones of their power, reducing market share.
Unless Apple can change its sales strategy in the future, the launch of a new iPhone will be hindered, and the company will continue to lose the battle for market share in China, as compared to its domestic rivals.