Apple’s China problem is that local phones are good and cheap

The relative success of the iPhone 6 has made it harder for Apple to sustain its growth rates

For Beijing resident Nie Miao, spending 5,000 yuan (Dh2,758, $749) on a new iPhone 6S from Apple “just isn’t an option”.

That’s because the lion’s share of his 7,000 yuan monthly pay goes toward the mortgage on the downtown apartment he bought last year. And he’s perfectly happy with the 2,000 yuan handset he got from Huawei Technologies Co.

The 29-year-old embodies the challenges in China for Apple, which has lost ground to local competitors.

It’s been almost two years since the Cupertino, Californiabased company revamped the iPhone for the sixth generation. In the meantime, rivals like Huawei and Xiaomi Corp have developed their own cheaper products with similar specifications, while the relative success of the iPhone 6 has made it harder for Apple to sustain its growth rates.

After forecasting a second consecutive quarterly sales tumble in April, Chief Executive Officer Tim Cook revealed the extent of the decline when he reported earnings on Tuesday. China generates about a quarter of Apple’s revenue, and deterioration there accounted for much of the sales drop.

Biggest phonemaker

Huawei supplied one in four new phones in the three months through May, leapfrogging Apple to become the biggest phonemaker by market share in urban China, according to a Kantar Group study published this month.

Guangdong Oppo Electronics Co’s share jumped fourfold to 8 per cent of the total.

“It’s a function of cheaper phones becoming good enough,” said Abhey Lamba, a San Francisco-based analyst at Mizuho Securities who recommends buying Apple shares. “Apple has done well at the upper end, but there’s not much more growth at the upper end of the market.”

The cheaper iPhone SE, which Apple started selling in March, was partially aimed at securing new customers in emerging markets such as China. So far, it has failed to meet those expectations, even as sales have exceeded forecasts in developed economies, Lamba said.

Apple may boost its China sales when the new iPhone arrives later this year, aided by the growing popularity of the App Store and customers’ tendency to upgrade their handsets every two years. That’s one reason why Huawei and Oppo introduced their flagship phones earlier this year — to get a head start on Apple.

After last year’s surge in Chinese phone sales, Apple has reaped the benefit in its App Store, with China overtaking Japan.

Preserving purchases

Once customers have paid to download programs from the marketplace, they are more likely to continue to buy Apple hardware to preserve those purchases. The iPhone 6S, released in September, came too soon after the original iPhone 6 model in 2014 to encourage upgrades.

“In China it’s about a twoyear upgrade cycle,” said Lauren Guenveur, an analyst at Kantar. Cost, however, is a mounting issue. While a 16 gigabyte iPhone 6S starts at 5,288 yuan, Huawei’s top-of-therange P9 costs 3,688 yuan, and includes 64 GB of storage, a fingerprint scanner and front and rear cameras.

“It is a fairly premium phone compared to the other models but it is a relatively lower price compared to the iPhone,” said Guenveur. “There is also a sense of pride of being a Chinese phone user and owning a Chinese phone.”

The smartphone market has fundamentally changed since the iPhone was first introduced in 2007. Back then, Apple marketed the device as a lifestyle accessory, but as smartphones have become ubiquitous, consumers’ focus has increasingly shifted to the features on offer.

“If you look at Huawei phones, or Xiaomi phones, it’s like ‘Wow they’re really good’,” said John Butler, a Bloomberg Intelligence analyst. “They’ve got great battery life, the screens are really sharp, the features are great.”

Apple more than doubled its Chinese revenue between 2013 and 2015 to $59 billion, expanding aggressively: it had 35 stores in the region by the end of March, up from 21 a year earlier.

Bloomberg Intelligence analyst