Can Apple Maintain its Dominance in China?

Rich Asplund - Barchart - Fri Feb 2, 10:32AM CST

Thursday’s earnings results from Apple (AAPL) showed its fiscal Q1 revenue growth in China dropped -13% to $20.82 billion, weaker than the consensus of $23.50 billion and the biggest decline in China since the 2020 holiday season. The slump in China, which accounts for nearly 20% of Apple’s total sales, was not unexpected after the Chinese government imposed stricter bans on the use of foreign technology in the workplace, and competition increased after local rival Huawei Technologies released a new smartphone touted as an alternative to the iPhone.

Overall sales of Apple products in China have weakened, including iPads and wearable technology sales. Apple also warned that iPhone growth in China in the current quarter looks to remain lackluster, which prompted KeyBank Capital Markets to say, “We believe expectations need to move lower, yet again.” However, Apple CEO Cook remained upbeat in an earnings call Thursday, saying, “I remain very optimistic about China over the long term,” and our faith in China wasn’t shaken as current customers continue to upgrade their devices.

Overall sales of smartphones in China have struggled, with Apple CFO Maestri calling the phone sector in China the “most competitive market in the world.” Even though several of the top mobile phone makers in China saw shipments decline last quarter, research firm IDC said Apple took first place in the market because it didn’t shrink as much as others. However, Huwaei Technologies, which the U.S. blacklisted over national security concerns, bucked the trend and rose to fourth place in China after its shipments surged +36% last quarter.

Despite all of the headwinds, Apple’s iPhone was the top-selling smartphone series in China for the first time last year. According to IDC, 2023 marked the lowest volume of smartphones in China over ten years due to a soft economic recovery and weak consumer sentiment. Apple reported $74 billion in revenue in China in 2023, up from $32 billion in 2014. A resurgent Huawei and other manufacturers prompted Apple to offer discounts of as much as 500 yuan ($70) on the iPhone 15, a step it usually doesn’t take. Huawei’s market share in the high-end phone sector rose from 11% in 2022 to 24% in the Q3 of 2023.

Apple remains in a quandary in China as the Chinese government’s latest restrictions to keep the iPhone out of state-run offices threaten to cut off Apple from some 80 million people who work at companies owned by the government. At the same time, Chinese competitors are offering increasingly credible alternatives to the iPhone. Counterpoint Research said, “This is a competitive issue,” as Huawei and other manufacturers pose a bigger threat to Apple than ever before.

Apple needs Chinese workers to make its iPhones and Chinese consumers to buy them. However, despite the Chinese government’s widening bans on foreign technology, Apple may have some leverage against increasingly hostile restrictions, as the company and its supply chain employ approximately 5 million people in China. If Apple were to relocate more production from China to Southeast Asia and India due to supply chain concerns and rising geopolitical tensions between the U.S. and China, it could further hurt China’s already struggling economy.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.