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Can Apple Challenge China’s Tech Giants in the Smart Speaker Market?

By Leo Sun - Dec 11, 2018 at 6:00PM

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Alibaba, Xiaomi, and Baidu won’t make it easy for Apple to gain ground.

Apple (AAPL 0.17%) will launch its HomePod smart speaker in China early next year for 2,799 RMB ($407), which is roughly 17% pricier than the US version. That might give Apple a head start against its US rivals Amazon and Alphabet's Google, which don't sell their smart speakers in China yet.

However, China's smart speaker market is already dominated by three of its own tech giants: Alibaba (BABA -1.03%), Xiaomi (XIACF -2.01%), and Baidu (BIDU -0.69%). Can Apple catch up to those three rivals, or is it already too late to the party?

Apple's HomePod.

Apple's HomePod. Image source: Apple.

China's smart speaker market

China is the world's fastest growing smart speaker market according to Canalys. The research firm reported that shipments across the country hit 5.8 million units during the third quarter of 2018, compared to fewer than a million units a year earlier. Alibaba led the market with 2.2 million units, Xiaomi ranked second with 1.9 million units, and Baidu ranked third with 1.0 million units.

However, Alibaba's shipments fell 26% sequentially, and Xiaomi's shipments dipped 6%; only Baidu posted positive growth with a 711% gain. This indicates that Baidu is successfully leveraging its market-leading search ecosystem and DuerOS virtual assistant to sell its lower-end Xiao DU smart speaker, which initially launched for 249 RMB ($36) but now costs just 89 RMB ($13) per unit, or 69 RMB ($10) for orders of two units or more.

The Xiao DU fared much better than Baidu's first-gen Raven H speaker, which was launched for 1,699 RMB ($244) last November. That aversion to higher-end smart speakers indicates that Apple could struggle to sell the HomePod for over $400 to Chinese consumers. Baidu also sells a smart display for 599 RMB ($86).

Baidu's Xiao DU.

Baidu's Xiao DU. Image source: Baidu.

Alibaba is leveraging its e-commerce ecosystem to convince household appliance makers -- like Midea, Haier, and AUX -- to bundle its Tmall Genie speakers with their smart home products. That move enabled consumers to immediately control their new appliances through the speaker, which could also be used to order products from Alibaba's Tmall. Alibaba launched the Tmall Genie with a retail price of 499 RMB ($72) last year, but it briefly slashed the price to $15 during Singles Day last year.

Xiaomi leverages its high market share in low-end smartphones, its expanding ecosystem of cheap smart home devices, and its online and offline retail ecosystems to sell its Xiao AI smart speakers, which cost 299 RMB ($43). The Xiao AI is tethered to Xiaomi's expanding ecosystem of Mi cloud services.

The odds aren't in Apple's favor

Baidu, Alibaba, and Xiaomi leverage their strengths in the online search, e-commerce, and smartphone markets, respectively, to sell smart speakers. Apple doesn't enjoy any of those advantages in China.

Apple ranked third in smartphones behind Samsung and Huawei in the second quarter according to Gartner, with an 11.9% market share. It's still widely considered a luxury brand in China, but sales of its iPhones are slowing down due to longer upgrade cycles and stiffer competition.

Meanwhile, escalating trade tensions -- exacerbated by the recent arrest of Huawei's CFO -- could cause Chinese consumers to favor domestic brands over American ones like Apple. Several Chinese companies recently revised their policies to require their employees to exclusively use Huawei devices, and that intensifying pressure could cause consumers to shun new Apple products like the HomePod.

Apple might argue that it's selling a high-quality streaming audio device, but Apple Music still reaches a tiny number of users in China compared to Tencent Music, the country's largest streaming music service with over 800 million monthly active users (MAUs). Tencent also sells its own smart speaker -- Tingting -- which lets users stream those songs while using WeChat, the top mobile messaging app in China.

The HomePod could be DOA in China

Apple's decision to launch the HomePod in China could be considered either bold or desperate. Bold if the company believes that it still has the brand strength to sell $400 speakers; or desperate if it's merely trying to peddle other hardware products to offset soft demand for its iPhones. Either way, it faces a tough uphill battle in the People's Republic.

On the bright side, the HomePod reportedly claimed nearly 5% of the global smart speaker market in the third quarter according to Strategy Analytics. That puts it in sixth place behind Amazon, Google, Alibaba, Xiaomi, and Baidu -- which indicates that it still has a toehold in this growing market, with or without China.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$137.59 (0.17%) $0.24
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$124.47 (-0.69%) $0.87
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$86.79 (-1.03%) $0.90
Xiaomi Corporation Stock Quote
Xiaomi Corporation
XIACF
$1.46 (-2.01%) $0.03

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