On Jan. 2, Apple (NASDAQ:AAPL) issued an earnings warning via a letter signed by CEO Tim Cook. In that letter, the company explained -- in fairly significant detail -- what drove the shortfall relative to its original financial guidance. The culprit was, according to Cook, "lower than anticipated iPhone revenue, primarily in Greater China."
Cook seemed to focus his blame on the macroeconomic environment in China, pointing to a slowdown in the Chinese economy. Exacerbating the problem in the Middle Kingdom, Cook explained, are "rising trade tensions with the United States."
Interestingly, Cook did concede that there are actions that the company can -- and is -- taking to try to boost its business performance in the face of the weakening macroeconomic environment. Here's what he wrote:
We can't change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results. One such initiative is making it simple to trade in a phone in our stores, finance the purchase over time, and get help transferring data from the current to the new phone. This is not only great for the environment, it is great for the customer, as their existing phone acts as a subsidy for their new phone, and it is great for developers, as it can help grow our installed base.
That's all interesting, but there seems to be another factor that Cook left out of this letter. Let's take a closer look.
Apple might be getting pulverized in China
Analyst Neil Shah with Counterpoint Research posted the following tweet shortly after Apple's negative revision:
3/ Chinese brands are are out-competing/out-marketing Apple on design, mobile-first innovations & value prop which is being recognized by brand-conscious Chinese consumers.— Neil Shah (@neiltwitz) January 3, 2019
The current iPhones are great for older gen iPhone users but not enuf to attract mature non-iPhone users.
He also tweeted the following in the same thread:
9/ Our China team via channel checks see the slowing iPhone demand a function of exorbitant price & uninspiring design change from iPhone X.— Neil Shah (@neiltwitz) January 4, 2019
The initial launch bump running up to Alibaba 11.11 was healthy w/ early adopters but the large majority upgrades/switchers are passing.
To support these claims, Shah also provided some data showing that while iPhone demand in China dropped by 15%, demand for Huawei's phones (Huawei is a major Chinese smartphone manufacturer) rose 15%. Now, this isn't an entirely apples-to-apples comparison -- Huawei sells a wide range of phones from low-end devices all the way to flagships, while Apple's devices are all premium-priced -- but it does seem clear that there's something more going on here than the macroeconomic environment being unfavorable.
Will Apple do anything about it?
I'd be stunned if Apple were to ever publicly admit that it has competitive issues. After all, doing so would not only serve to further undermine investor confidence, but it'd probably make the company's products less desirable, too.
The important thing is that Apple realize the problem internally and take action to address it as quickly as practicable. The good news is that there's evidence to suggest that in these kinds of situations, the company doesn't stick its head in the proverbial sand. Although the Mac maker never admitted it publicly, an internal Apple slide that came out as part of the litigation between Apple and rival Samsung (OTC:SSNLF) many years ago showed that the former was keenly aware that not having large-screen devices was an issue for the company, back in the pre-iPhone 6 days:
For the sake of Apple's future, I hope that the company is internally discussing what it is that the competition currently offers that it doesn't and takes action to bring those offerings to consumers as soon as practicable.
Check out the latest Apple earnings call transcript.