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Will the iPhone SE Reverse Apple's Slowing Growth in China?

By Jamal Carnette, CFA – Mar 26, 2016 at 6:40AM

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A cheaper iPhone should reverse slowing sales and increase market share.

Apple's store in Shanghai. Image source: Flickr user Jon Skilling.

China has been a large part of Apple's (AAPL -1.56%) growth story over the past few years. Since fiscal 2013, Apple has grown its Chinese-based revenue 47% annually versus overall top-line growth of 17%. As a result of this amazing growth, Greater China has pushed past Europe as Apple's second-largest geographical market trailing only the Americas. The following chart shows Apple's tremendous growth in China versus the rest of the company on a quarterly basis:

Source: Apple's quarterly reports. Revenue figures in millions.

Growth in China has been able to obscure slowing growth in the rest of the company's business, however, according to Kantar Worldpanel, growth in the Middle Kingdom is now slowing for Apple. Can Apple reverse this trend?

Kantar Worldpanel brings good and bad news for Apple
Kantar's latest data from urban China shows Apple remains the most-popular smartphone brand in the country with a 25% market share in the three-month period ending in January. On a year-on-year basis, Apple grew its market share 1.1 percentage points above the 23.9% share Kantar reported in January 2015. However, Kantar chief of research Carolina Milanesi reported, "January was the weakest month for Apple in China." Milanesi credited the then-upcoming Chinese New Year promotions as a possible reason for the slowdown in the period.

Apple's market-share gain comes at the expense of a variety of manufacturers sporting Alphabet's (GOOG -1.83%) (GOOGL -1.83%) Android ecosystem, among others. Kantar reports that Android market share fell from 74.2% to 73.9% on a year-on-year basis. The catch-all segment "other" reported the highest market share percentage losses, falling from 0.9% to 0.3%, pointing toward continued market consolidation.

Will Apple's new iPhone change its slowing-growth trajectory?
China is not a perfect market for Apple. Apple's starting price of $650 for a new iPhone 6s is expensive considering The World Bank estimated China's GDP per capita was $7,500 in 2014. As a result of having a product priced near 9% of the average citizen's annual salary, it will be difficult for Apple to acquire a market share similar to its 39.1% share in the United States without strong, continued GDP per-capita growth or cheaper smartphones from Apple.

Apple obviously understands this reality. Recently, Apple confirmed that the company would sell a current-gen 4-inch iPhone SE with preorders starting on March 24 and shipment dates on March 31. The company is pricing the phone at a starting price of $399 to offer a lower-cost option to grow market share.

Whether the iPhone SE will be value-accretive for investors is another question altogether. Specifically, there are risks of possible cannibalization if consumers shift from the larger, more expensive variants to the iPhone SE, hurting Apple's top line and heavily watched gross profit margin. In the short term, however, Apple appears more concerned with growing its market share with price-sensitive customers in both developed and developing markets.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and 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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