Surprise! Apple Inc. Is Losing Market Share in China

Apple (AAPL -0.57%) CEO Tim Cook has been quite vocal about the company's iPhone opportunity in China. Indeed, back in 2013, he went on record with a prediction that, at some point down the line, China would become its largest market by revenue.

An Apple store in Shanghai, China. Image source: Apple. 

During the iPhone 6 cycle, Apple saw tremendous growth in China, with sales surging a whopping 84% year over year. However, during the iPhone 6s cycle, Apple has seen its sales performance disappoint, as the table below shows:

Double-digit year-over-year declines are bad. Data source: Apple SEC filings.

Based on these numbers, it's clear that Apple lost significant market share in China over the last couple of quarters. And if new research from UBS (via CNBC) is to be believed, the iPhone 7 isn't helping to turn things around in that region.

Indeed, UBS' Steve Milunovich says that "iPhone 7 sales are weaker than the 6s was out of the box." The culprit behind that underperformance? The analyst says that Apple is "losing share to domestic handsets."

This isn't too surprising

The problem that Apple faces in China is simple to understand: Apple's products are generally very good and the company's brand is quite strong. However, many of these China-based smartphone makers are managing to deliver products that are very similar in terms of performance and features to what Apple is selling at just a fraction of the price.

Take, for example, the Xiaomi Mi5 smartphone that launched earlier this year. The phone comes with a Qualcomm (QCOM -1.75%) Snapdragon 820 processor, a 1920-by-1080-pixel display, pleasing aesthetics, and so on. In China, the phone starts at the equivalent of just (approximately) $261, per AnandTech.

And Xiaomi isn't the only one. There are many brands in the region that put out some very compelling smartphones at extremely low prices. This is the reality that Apple must deal with.

How can Apple compete more effectively?

There's no beating around the bush here: Apple has a very serious competitive problem in China, and if it wants its revenue from the region to resume growth, it's going to need to improve its competitive positioning in the market.

Apple can do this in one of two ways. The first is that it can work to build products so compelling, so differentiated that these local players can't easily build similar phones and sell them for relatively bargain-basement prices.

Apple's phones are already differentiated in several key ways, but based on the comments from UBS, it's apparently not enough to fend off those competitive threats. Apple may simply need to further step up its pace of innovation here, particularly in terms of the look and feel of future devices.

Another way that Apple could compete is to simply drop prices. However, this isn't a desirable option for a few obvious reasons, including:

1. Apple would essentially be trading average selling prices for revenue, which could ultimately wind up being profit-neutral at best and profit-eroding at worst.
2. Apple can't just cut prices significantly in one region without slashing them elsewhere. Gaining share in China probably wouldn't be worth it if the company wound up needlessly reducing its profits in other regions.
3. Apple's competition can cut prices, too.

Slashing prices is a terrible way to try to drive business, and should only be used as a last-ditch effort by struggling companies. It's much better to try to increase the value delivered with each product while keeping average selling prices flat or up rather than cutting prices.

It will be interesting to hear Apple's views on the China market when the company hosts its next earnings call, scheduled for Oct. 25.