tim cook apple china

China generates 25% of all Apple’s profits and is the company’s second-largest market. It’s expected to eventually become the company’s single biggest market in time.

But China is also Apple’s biggest problem right now. The company is in freefall in China, with declining sales and loss of market share to local smartphone competitors like Huawei, OPPO, and Vivo. The iPhone has only a 14% share of the China market, according to research firm Gartner.

According to Bernstein analysts Toni Sacconaghi Jr. and Daniel Chen, iPhone sales have dropped 20% in China.

“Apple’s recent weakness in China has largely been due to iPhone. During the Q2 17 earnings call, Apple spoke of 20% revenue growth for Mac and “double-digit growth” for Services in Greater China, which suggests that iPhone + iPad revenue must have declined at least double digits at constant currency. Third party market research (IDC) corroborates that Apple’s >$500 ASP smartphone units declined >20% in each of the past 5 quarters in Mainland China,” the pair wrote in a recent note to clients.

“A key question for Apple’s stock is, ‘What is happening in China?'” they wrote.

The analysts at Longbow Research and Oppenheimer agree. Apple’s “Reality Distortion Field” is “fading” in China, the Oppenheimer team told their clients. (The phrase “reality distortion field” is a reference to Apple founder Steve Jobs’ legendary ability to persuade people around him to believe things that might not be true.) 

Here’s a chart from BI Intelligence showing the problem. While sales growth has stumbled worldwide, the problem in China is at least twice as bad as any other market:

bii apple revenue yoy growth by region q1 2017

There are two possible explanations for this, one that is essentially positive for Apple and one that is not.

The upside explanation is that Chinese consumers are much more driven by new products, and they have held off from buying the iPhone 6s and iPhone 7 models because they were too similar to iPhone 6, which was a huge hit in China. In this scenario, Chinese sales will likely increase again if the upcoming iPhone 8 is sufficiently new and exciting. Apple has a big installed base of legacy users, and they will drive a big replacement cycle in the fourth quarter of this calendar year.

The other scenario comes from Oppenheimer analyst Andrew Uerkwitz and his team, in a note titled “Fading ‘Reality Distortion Field,'” said that the unique dominance of certain Chinese apps hurts Apple. Those apps are fully functional on Android, which dominates China, but not on iPhone. Apple doesn’t allow Tencent users to use the tipping function inside WeChat, for instance. That won’t sound like a big deal to people in the West, but in China apps like WeChat are used almost ubiquitously. It has 1 billion users.

The Oppenheimer note — based on conversations with Apple’s own suppliers — says:

“We recently conducted a series of company meetings in China and Taiwan that focused on the smartphone supply chain. There was general consensus among our conversations that confirms our thesis that Apple’s dwindling market share in Greater China is due to the lack of compelling differentiation among hardware and software. The mobile user experience in China is heavily dictated by Tencent and other local Internet companies, making Apple’s software and services ineffective as key differentiators. That said, we do believe there is pent-up demand for iPhone 8, which is widely reported to make a few major design changes. We expect a temporary rebound in share.”

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Source: http://www.thisisinsider.com/apple-sales-revenues-china-2017-5

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