Please ensure Javascript is enabled for purposes of website accessibility

Apple Inc. Has Another China Problem

By Ashraf Eassa - Feb 16, 2018 at 6:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple's lower-end iPhone models aren't holding up well in the Middle Kingdom.

The Greater China region was once widely viewed as one of the largest growth opportunities for Apple (AAPL 0.00%). After all, for a time, the smartphone market in China was booming, and Apple was widely viewed as an aspirational brand in the region. 

However, as smartphone growth in China cooled off, and as local Chinese brands like Xiaomi, Oppo, Vivo, and Huawei began bringing flagship features and design elements to lower-cost products, Apple began to see its sales in the region drop. Apple reported a 17% drop in revenue in the region during fiscal year 2016 (iPhone 6s cycle) and another 8% drop there in fiscal year 2017 (iPhone 7 cycle). 

Apple's iPhone X lineup.

Image source: Apple.

Apple got off to a strong start there in the first quarter of fiscal year 2018, with revenue growing 11% year over year there. However, according to research from analyst Katy Huberty (via Barron's), Apple's iPhone business faces yet another significant problem in the region. 

Older iPhone models aren't holding up

According to Huberty, demand for Apple's older-generation iPhone models (iPhone 6, iPhone 6s, and iPhone 7) is "fading as Chinese brands respond to significant loss in the mid-market during 4Q17." 

Indeed, Huberty claims that the Chinese smartphone makers are cutting prices to blow out inventory, and that such price cuts are set to "intensify" in service to those efforts. 

On Apple's online store in China, a 32GB iPhone 6s -- that's an iPhone that launched in Sept. 2015 and is far from cutting edge -- sells for 3,788 RMB, which converts to roughly $596. An entry level iPhone 7, a device that's a year newer, sells for 4,588 RMB, which translates into about $723. 

Considering the steep prices for these devices in China, and considering the availability of smartphones from local Chinese manufacturers with better hardware specifications than Apple's lower-end devices at lower prices, it's not hard to see why the older iPhone models are failing to hold up in the region. 

For some context, one report claims that the best-selling smartphone in China during 2017 was the Oppo R9s. 

The phone looks very similar to an iPhone 6s Plus and sports a display with a similar size to the one on the iPhone 6s Plus. It doesn't run iOS, and the internals are inferior (though it does have more RAM and twice the storage of the entry-level iPhone 6s), but it's a "good enough" emulation of the iPhone 6s Plus that launched at just 2,799 RMB (roughly $440).

Considering that the Chinese smartphone market is replete with devices that look similar to Apple's older iPhone models but sell for substantially less, is it any wonder that Apple is having a hard time selling anything but its halo models in the region?

What can Apple do about it?

At this point, it's hard to see what Apple can do about this problem over the long term. Apple's best bet is to try to fortify its position in the premium portion of the China smartphone market with innovative products at higher price points. 

Apple seems to be doing just that with this year's rumored lineup -- it's reportedly planning to launch a successor to the current iPhone X, a larger version of that successor to the iPhone X (in China, larger-screen phones are quite popular), as well as a lower-cost device that incorporates most of the goodness of the new iPhone X, but with some cost optimizations (e.g., lower-cost display technology, use of an aluminum frame instead of a stainless steel one). 

I don't see a way for Apple to win in China at lower price points, so it will have to simply do its best to win the hard-earned cash of China's most affluent smartphone users. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.