China, once among Apple's (NASDAQ:AAPL) hottest markets, weighed on the company's third-quarter results. Greater China sales were down 13.9%, year over year. While it's easy to assume that the Cupertino-based tech giant's lackluster performance in the region makes for a legitimate bear argument for Apple stock, I'll have to strongly disagree.
Apple's challenges in Greater China
It's tough to compete with a $129 smartphone -- especially in China. China's Xiaomi has been shipping products for only about two years, and its smartphone shipments just passed up Apple, according to recent data from Canalys. Overtaken by Huawei and Xiaomi, Apple slipped to seventh place in China's smartphone market share during the second quarter. Its slice of the quarter's shipments amounted to a paltry 4.8%.
Sure, Xiaomi certainly isn't the sole reason for Apple's trouble in the region. But Xiaomi's success at lower price points despite Apple's troubles paints a clear picture of Apple's big challenge in China: iPhones are too expensive for all but a small minority of the population.
Threat or opportunity?
While Apple's falling sales and market share in China undoubtedly reflect its difficulties in the region, it also highlights the company's opportunity.
Let's look at the glass half full. If Apple does manage to introduce a low-cost iPhone, there are plenty of first-time buyers Apple could recruit into its ecosystem.
Furthermore, if Apple does provide China with a smartphone people can afford, Apple's value proposition will be hard to imitate, especially in these two areas:
- The iPhone's impressive customer satisfaction and retention.
- Apple's powerful halo effect and its robust ecosystem.
Plastic back or not, iOS will summon much of these benefits to consumers fingertips.
Even more, low expectations for Apple stock mean that China could easily provide some spark for Apple's stock if Cook & Co. find a way to reinvigorate the market's optimism for its products.
Waiting on a low-cost iPhone
Without a low-cost iPhone, however, Apple will mostly likely continue to struggle in the region. But if rumors are right, Apple's answer to emerging markets could be just around the corner.