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Apple's iPhone Business Is Taking a Beating in China

By Ashraf Eassa – Updated Apr 10, 2019 at 4:01AM

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The company appears to be losing substantial market share.

When Apple (AAPL 0.83%) announced negative revenue guidance on Jan. 2, the company mainly blamed weakness in iPhone shipments in China for its revenue shortfall. Among the reasons cited for that weakness were the ongoing trade tensions between the U.S. and China, as well as an economic slowdown in the region.

According to a new report from market researchers with IDC, overall smartphone unit shipments in China dropped 9.7% year over year to 103 million. Even though the overall market appears to have slumped, Apple's decline was much faster, with IDC reporting an eye-popping 19.9% decline in iPhone unit shipments in the region.

People outside of an Apple store in China.

Image source: Apple.

What this means is that Apple is losing significant amounts of market share in the region and the company needs to do something about it. Let's go over what that might be. 

More aggressive product innovations

A translation of IDC's report indicates that the company's 2018 iPhones offered "no major innovation" to spur upgrades. Additionally, the analysts seem to argue that the aggressive pace of product innovation on the part of Chinese smartphone makers is further hurting Apple's position in the market.

For some perspective, Huawei -- the top smartphone maker by unit share in China -- saw unit shipments in the region grow by 23.3% year over year during the fourth quarter, dramatically outpacing the overall market. It's gaining significant amounts of market share, likely in part at the expense of Apple. 

The approaches that Huawei and Apple take to product releases are quite dissimilar. Huawei launches new flagship devices roughly every six months and tends to be very aggressive with updates both on the feature sets of those devices as well as their aesthetics.

Apple, on the other hand, launches new flagship smartphones only once per year, and updates the look and form factors of those devices at a much slower pace. For example, the devices in Apple's current iPhone lineup (iPhone XS, iPhone XS Max, and iPhone XR) share the same basic look with the iPhone X that was launched in November 2017. If you believe the rumor mill (which, for Apple, tends to be quite accurate), the iPhones that will be launched later this year won't look much different from today's models.

Check out the latest Apple earnings call transcript.

If Apple wants to improve its competitive positioning in China's premium smartphone market, it would probably do well to deliver more-substantial form factor changes with each generation.

Another thing to consider is that Apple participates pretty much entirely at the high end of the market (even Apple's discounted iPhone 7 series is pricier than many of the smartphones sold in China), while Huawei's portfolio runs the gamut of price points. So, any additional trouble specific to the high end of the Chinese smartphone market will be magnified in Apple's iPhone sales performance.

Watching for a bottom in China

While it might be tempting for some to dismiss the recent plunge in Apple's iPhone business in China, this is a troubling trend. Moreover, even after posting a revenue decline of 26.6% in the region during the December quarter, the company's Greater China business still represented 15.6% of its consolidated revenue in the quarter.

This is still a significant amount of Apple's overall revenue. If the company continues to suffer such large declines in the Greater China region, then that'll be a significant drag on the rest of the business, making it that much harder to deliver meaningful growth.

Apple's leadership needs to find a way to stem these declines in Greater China and, over a longer period of time, get sales in the region growing again. The problem is serious, and while I do think that changes to the company's product development methodology and release cadence could help, my guess is that such changes are necessary but only a first step, as the competition in the region isn't going to sit still. 

If Apple can show that its business in the Greater China region is close to bottoming, then I'd be much more comfortable with the company's near-to-medium-term business prospects and, ultimately, the stock.

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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