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Why is Apple struggling in China?

When Apple warned on Wednesday that revenues for the final three months of 2018 would be as much as 10 per cent lower than expected, the company largely blamed China’s slowing economy.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” said Tim Cook, chief executive.

While analysts have questioned just how much blame could be pinned on China, Apple’s fortunes rely heavily on the world’s biggest smartphone market.

Why does China matter so much to Apple?

China is the world’s biggest smartphone market, accounting for about a third of units sold worldwide.

Apple has profited — including Taiwan and Hong Kong, the Greater China region is Apple’s third-largest source of revenues — by positioning itself as an aspirational, luxury brand and tapping into the country’s growing middle class. Its devices cost as much as Rmb12,700 ($1,856), more than twice its competitors’ top-end phones.

The company has also worked hard to satisfy authorities in such a crucial market. In 2017, Apple moved all of its Chinese users’ personal data to a $1bn data centre in Guizhou, in anticipation of tighter data localisation requirements. The company has also been criticised for removing 674 VPN apps, which protect users from government censorship and surveillance, from its China app store.

But Apple’s growth in the country has been uneven. By August 2017, the company had seen 18 consecutive months of revenue declines in China, leading some analysts to forecast that the iPhone maker was destined to failure. But the company followed that with four quarters of double-digit growth.

On Wednesday, it said that global revenues were likely to come in at $84bn, a decline of some 5 per cent from previous guidance for the quarter.

How is China’s economic slowdown hitting smartphones?

China’s economy has been slowing through a combination of weakening domestic demand and a fierce trade war with the US.

The country’s private manufacturing sector offered the latest negative signs on Wednesday, with the Caixin manufacturing purchasing managers’ index contracting for the first time in 19 months in December.

“Consumer confidence fell off a cliff in October, the worst it’s been in the 20 years I’ve been working on China,” said Shaun Rein, managing director of China Market Research Group in Shanghai.

The declining consumer confidence has, in turn, hit the mobile market. After eight years of growth, smartphone unit sales fell for the first time in 2017, according to data from research firm IDC.

Sales continued to decline last year, and some analysts say the slowdown hit Apple more aggressively amid increased competition.

“The market overall is slowing down, but more so for Apple,” said Kiranjeet Kaur, senior Asia-Pacific research manager at IDC, pointing to growing competition from local brands such as Huawei and Xiaomi.

How have Chinese rivals challenged Apple?

Chinese companies, led by Huawei and Xiaomi, have eaten into Apple’s market share in recent months.

Huawei surpassed the iPhone maker for the first time last year to become the world’s second-biggest smartphone maker, behind Samsung.

Along with Xiaomi, the Shenzhen-based group sells handsets that are much cheaper than Apple’s — with Huawei handsets selling for as much as 50 per cent less than Apple products.

FT Confidential, the research service, has also found that Chinese consumers are less willing to pay to upgrade to newer Apple iPhones, but are happier to upgrade older, cheaper models. Just 1.1 per cent of respondents to a poll conducted by the research group said they would be willing to spend more than Rmb10,000 on a new smartphone.

But analysts say that in addition to beating Apple on price, Chinese companies have been quicker to innovate.

For example, Huawei has offered dual-Sim card support for more than a decade, while Apple only added the function to its newer models in September.

The Chinese company’s latest phones also offer multiple cameras, on-screen fingerprint ID and even reverse wireless charging, whereby your device can be used to charge other mobiles.

“As Chinese consumers’ demands increase, they get more sophisticated about noticing price-quality ratios,” said Guan Yiting, smartphone analyst at market research firm Canalys. 

“Huawei has launched new phones with excellent battery power, new and fast chipsets, for within Rmb4,000 ($580),” Ms Guan added. “Apple’s iPhone is not as attractive as before — Chinese consumers have more alternatives.”

Huawei’s smartphone sales by value grew 24 per cent in the third quarter of 2018, compared with only 8 per cent for Apple, according to IDC.

Are China-US tensions to blame?

The US-China trade war has hurt the wider Chinese economy, but some analysts believe it has affected Apple’s sales directly.

A surge in patriotism since the beginning of the trade battle — and especially since the arrest of Huawei’s chief financial officer Meng Wanzhou in December following a US extradition request — has led some consumers to favour local brands.

One Zhejiang-based technology company explicitly forbid employees from buying iPhones and offered subsidies for buying Huawei phones, instead. Some restaurants have also offered discounts to customers with Huawei phones.

While analysts say the effect may be minor, it reflects badly on Apple’s reception in China.

“There’s a negative sentiment against the iPhone in the market,” said Ms Kaur.

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