Market research firm Gartner's latest smartphone market share report clearly shows Apple's (NASDAQ:AAPL) stagnating business. The iPhone maker's device sales were flat year over year during the first quarter at around 51 million, according to Gartner, even though the overall smartphone market grew 9% over the same period.

Not surprisingly, Apple's smartphone market share dropped 1.1 percentage points from the prior-year period to 13.7%, as the Chinese triumvirate of Huawei, Oppo, and Vivo clocked massive gains.

Company

Q1 2017 Shipments

Q1 2017 Market Share

Q1 2016 Shipments

Q1 2016 Market Share

Samsung

78,671.4

20.7%

81,186.9

23.3%

Apple

51,992.5

13.7%

51,629.5

14.8%

Huawei

34,181.2

9.0%

28,861.0

8.3%

Oppo

30,922.3

8.1%

15,891.5

4.6%

Vivo

25,842.2

6.8%

14,001.0

4.0%

Others

158,367.7

41.7%

156,654.2

45.0%

Total

379,977.3

100%

348,224.1

100%

Data source: Gartner, May 2017. Shipment figures are in thousands of units.

China is a problem for Apple

One of the main reasons Apple's sales are going nowhere is its declining sales in China, the world's largest smartphone market, accounting for a third of all global sales. Apple's iPhone revenue from Greater China has dipped year-over-year for five straight quarters, as homegrown manufacturers have taken the market by storm. Greater China revenue was $10.7 billion in the fiscal second quarter for Apple, about 20% of the total. But the revenue from the region was 14% lower than the Greater China haul from the year-ago quarter, when it made up about 25% of the total.

Promotional material of Apple Clips, as seen on three iPhone screens.

Image source: Apple.

What's more, Chinese original equipment manufacturers (OEMs) are making a mark in emerging markets and in developed regions such as Europe, thanks to feature-packed phones at reasonable prices. Will Apple's next iPhone help it recover ground?

Apple seems to have a smart strategy for the next iPhone

Cupertino is rumored to be launching three iPhone models this year. Two of these models could be refreshed versions of the current-generation devices, carrying the 7s and the 7s Plus moniker, while the third could be the more impressive anniversary-edition iPhone 8. UBS forecasts that the iPhone 8 could start retailing from $870 and might go all the way up to $1,070.

What's more, UBS analyst Steven Milunovich forecasts that the higher-priced iPhone could make up as much as 45% of Apple's total iPhone sales. A Morgan Stanley report calling for 50% of the upcoming iPhone models to be equipped with an OLED display backs up that forecast. This could be a big deal for Apple investors, as Apple could ship around 65 million units of the more expensive device, given other estimates of 130 million units in 2017. Therefore, Apple's revenue would get a nice boost if it can sell all of the iPhone 8 models it manufactures.

It won't be surprising if the more expensive iPhone finds a lot of takers, because of the rumored tech that it could be packing. In addition, the average selling price of smartphones is rising, as customers are willing to shell out more money for better features, according to Gartner, and this trend could also play in Apple's favor.

Meanwhile, the iPhone upgrade cycle is another catalyst investors shouldn't miss. Research firm Bernstein forecasts that 203 million iPhone users will be ready to upgrade to a new device next year, and that's where the 7s and 7s Plus models could come into play.

A $1,000 iPhone might not bring in the volume  for Apple, as it might alienate existing customers who are more accustomed to the $649 base price. So it would be doing the right thing by launching two relatively cheaper models that can help it compete effectively against the new Samsung Galaxy S8 and push volume, while the more expensive flagship could help bring in more dough.

China could weigh on the iPhone 8's success

Apple's existing user base and the developed markets are definitely going to be a catalyst for the next set of iPhones, but it remains to be seen if the company can make a comeback in China. Even if Apple comes out with a highly innovative device that captures the imagination of the Chinese customers, its success isn't guaranteed, since Huawei, Oppo, and Vivo are strong players in the country.

For instance, Huawei had close to 50,000 retail locations last year, with a huge majority spread across China. Oppo, on the other hand, has 200,000 retail locations in the country. Both of these companies have resorted to offering substantial incentives to retailers and distributors, creating a positive impact on sales.

Apple, meanwhile, has just 40 stores in China and some estimates are that 40% of smartphone sales in China are done in a physical store. Apple's weak access to the Chinese smartphone market could be a constraint for the upcoming set of iPhones, apart from the premium pricing, so Apple might not be able to gain significant ground against its Chinese rivals even if it launches a cutting-edge device.

Investors shouldn't bet on a resounding success for the upcoming iPhone generation, unless Apple finds a way to move more units in its second-largest market.

 

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Gartner. The Motley Fool has a disclosure policy.