New iPhone covers are displayed on screen during a Special Event at Bill Graham Civic Auditorium Sept. 9, 2015 in San Francisco.Stephen Lam
Perhaps the most important number in Apple's quarterly release on Tuesday came from China, and it's not the good news Apple makes out. The company's over reliance on the Chinese market is starting to hinder its progress despite management's attempts to give it a positive spin.
During Tuesday's earnings call, Apple chief executive Tim Cook sang the praises of the Chinese market, saying it will one day be Apple's largest. In fiscal 2015, which ended for Apple on Sept. 26, Greater China provided 25 per cent of the company's revenue, for the first time overtaking Europe, responsible for just 21.6 per cent of Apple sales. An economic slowdown? Not according to Cook, who is worth quoting at length here:
Frankly, if I were to shut off my web and shut off the TV and just look at how many customers are coming in our stores regardless of whether they're buying, how many people are coming online, and in addition looking at our sales trends, I wouldn't know there was any economic issue at all in China. And so I don't know how unusual we are with that. I think that there's a misunderstanding, probably particularly in the Western world, about China's economy, which contributes to the confusion. That said, I don't think it's growing as fast as it was; but I also don't think that Apple's results are largely dependent on minor changes in growth.
The statistics Cook cites in support of this view are impressive: 87-per-cent growth in iPhone sales year-on-year in Greater China (which includes Hong Kong, Taiwan and Macau) despite the entire market's 4-per-cent growth; revenue almost twice as high in the last quarter as a year ago; and the iPhone 6 now the bestselling smartphone in China, with the iPhone 6 Plus at number three. These numbers are less relevant, however, than two others: a drop in quarter-on-quarter sales in Greater China and an erosion of Apple's overall market share there.
In the last quarter of fiscal 2015, Apple made $12.5-billion in revenue in Greater China, a 5.4-per-cent drop compared to the previous three months, despite the inclusion of the first weekend of iPhone 6s sales in the fourth quarter, 2015 data. In 2014, the new iPhone 6 wasn't immediately available in China, so the fourth quarter didn't benefit from the new product boost -- and still sales were higher than in the previous three months.
Cook is wrong to say the Chinese slowdown isn't affecting his company's sales. The effect has been immediate and quite obvious. But Apple's market share in the Asia Pacific region, which includes China, wasn't growing even before it manifested itself.
According to data compiled by Bloomberg Intelligence, in the second quarter of this year, Apple's market share of smartphone unit shipments in the region dropped to 7.7 per cent from 10.8 per cent in the previous quarter as Chinese leaders Huawei and Xiaomi increased their shares. Apple is the Asian smartphone market leader in terms of value, but its share by that measure also dropped in the second quarter -- to 34.1 per cent from 42.7 per cent in the previous three months. Again, Huawei and Xiaomi posted gains, although Korean producers such as Samsung and LG also managed to pick up some of Apple's losses. As Apple's revenue in the region dropped, it was unlikely to have made share gains in the last quarter.
Cook is banking on the future growth of the Chinese middle class, and that's an obvious long-term bet to make, but under the current economic conditions, this growth is not likely to be explosive. Besides, Apple won't even be able to grow its sales at the same rate because many Chinese consumers will opt for better-value devices from local producers, as they're already doing, judging by the market share data.
Improving distribution in China yielded strong revenue gains for Apple this year. Greater China accounted for 53 per cent of the company's revenue growth in fiscal 2015. Unless China's economic troubles are miraculously cured over the next year or Huawei and Xiaomi stop making cutting-edge devices for a fraction of Apple's prices, this growth engine has stalled. Nor does Apple have any comparable opportunities for extensive growth anywhere else in the world.
Cook's bet on China was, of course, no mistake: It would be a crime for a device producer not to develop a strong presence in the world's most populous country. Focusing on China was a business decision that produced gains comparable to a ground- breaking product launch, especially in 2015. There are no more miracles coming out of China, however, and no more technological rabbits coming out of Apple's hat. It's time for some stagnation and retrenchment -- at least by this company's remarkably high standards.