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1 Massive Threat to Apple Inc.'s China Ambitions

By Ashraf Eassa – Mar 4, 2016 at 11:30AM

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Local Chinese smartphone vendors are proving to be brutally competitive.

Apple (AAPL -2.63%) CEO Tim Cook is quite bullish on the China market, even going so far as to say that over time Apple's sales in the region will surpass those in North America to become its largest market. Indeed, during fiscal year 2015, Apple saw sales in the Greater China region surge 84% year over year to a whopping $58.72 billion.

However, sales growth in China for the iDevice maker slowed in its most recent quarter, with growth slumping to just 14% year over year. And on the fiscal first-quarter earnings call, Cook admitted to seeing "signs of economic softness" in the region.

In addition to this "economic softness," there's another big threat to the company's ambitions in the region: local Chinese smartphone vendors.

Have you seen what these companies are putting out?
There are a number of smartphone makers in China, and the products they're churning out are quite compelling. In fact, I would argue that a number of these vendors are producing smartphones that, at least from a hardware perspective, match or even exceed Apple's best iPhones in a number of ways.

Take Xiaomi, for example. The company's latest Mi5 smartphone seems to outclass the iPhone 6s/6s Plus virtually across the board. This phone, which has hardware specifications that are generally superior to those of Apple's flagships, is priced at about half the cost of an iPhone.

Xiaomi isn't the only one, though. Smartphone vendor Vivo recently announced two flagship models: the Vivo Xplay 5 and the Vivo Xplay 5 Elite. Here's what the Xplay 5 Elite looks like:

Vivo's latest flagship. Image credit: GSMArena.

This phone looks gorgeous (and very similar to an iPhone 6s Plus), features a sharper, curved OLED display, packs in 6 gigabytes of memory, an arguably more advanced camera sensor, fingerprint reader, and a high-end Snapdragon 820 processor. Oh, and it comes with 128 gigabytes of storage, to boot.

All of this can be had for $655 -- cheaper than an iPhone 6s Plus, which has just 16 gigabytes of storage.

There are plenty more examples of Chinese smartphones that are more advanced and affordable than Apple's offerings.

Apple needs to pull ahead in terms of features
If Apple wants to succeed in the China market, it can't afford to put out hardware that's less sophisticated than what these local vendors are making. Indeed, given that Apple has research and development resources that these vendors could only dream of, it's baffling that Apple has let its products fall behind brands that most people haven't even heard of.

Indeed, it would be less of a problem if Apple's phones were more advanced and more expensive, but being technologically behind and more expensive is a recipe for market share loss. 

Expect Apple's China sales to stall in the near term
As these flagship Chinese smartphones roll out, I expect that Apple will see its market segment share erode in China over the next two quarters. Whether Apple will recapture that lost share and return to higher levels of revenue growth, in my mind, depends on how compelling the iPhone 7/7 Plus/Pro are.

Apple has an opportunity to deliver a substantial leap with these new phones. We'll see in about six months' time whether the iDevice maker delivers some truly epic new phones.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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