Apple wilts in China as smartphone market heats up

Apple’s flagship store in Wangfujing, a central shopping district in Beijing, is a hive of activity. But, unfortunately for the iPhone maker, most people are not there to buy.

Part of the problem might be short term, according to staff in the shop. Many Chinese are putting off buying an Apple device until the new iPhone 7 model comes out in September, says an employee, adding that a lull in sales before a big launch is to be expected. “There’s no reason for any concern; when the new phone comes out sales will pick up,” he says.

Liu Shan, a matronly woman guiding her young teenage cousin around the store, is one of the few seemingly in the shop to buy a phone - but even she fails to show the sort of devoted Apple fandom that made China its largest market outside the US.

“She’s just a student,” she says of her youthful charge, flicking through a display of iPads, “so there’s no need to wait for an iPhone 7. We’re very pragmatic.”

This lack of excitement points to the bigger problem Apple faces in China. A drop in revenues in the country by a third last quarter signalled to some that the company’s capacity to dazzle smartphone shoppers has been diminished amid stiffer competition from cheaper local competitors producing more technologically advanced devices.

The fall in sales should not have come as a surprise. Baidu, China’s biggest search engine, used a fall in search queries as a proxy for foot traffic to Apple stores to correctly predict a 23-34 per cent year-on-year fall in Apple’s quarterly revenues in China.

Chinese smartphone users are no longer buying into the hype as they once did. When Apple first launched an iPhone in 2009, the smartphone was a status symbol for young Chinese middle class consumers.

Apple consolidated its position with the release of several new phones aimed at the local market - briefly pushing the group to the top of China’s smartphone market last year.

But Xiang Ligang, an expert on China’s telecommunications sector, says that Apple now faces a challenge in “keeping itself interesting” in China, namely that the group was “looking like a trend follower these days”.

Crucially, local rivals have caught up with, and in some cases exceeded, the sort of technological advances that were once the calling card of the US tech group. Rumours suggest the forthcoming iPhone 7 will have a dual lens camera, for example, but by the time it launches in September “it will look old”, says Mr Xiang.

Many competitors already have a dual lens camera on their newer phones, such as Huawei’s P9 launched in April, and Xiaomi’s Redmi Pro.

“The Chinese phonemakers are fast catching up with Apple in quality and performance, and the consumer mindset is also evolving,” he says. “Some users will always associate Apple with wealth and taste, but for a lot of users, sporting a Huawei or Oppo will no longer cause them to lose face.”

Getting China right is important for Apple. Until the previous quarter, it was the group’s fastest growing market.

The drop in sales in China has added to Apple’s woes as it faces a number of setbacks in the country, from a spurious copyright infringement lawsuit - alleging a Chinese company owned the iPhone trademark - to a ban on its iTunes video service.

But devices are key to its success. Apple has ceded ground to Huawei, as well as to relatively unknown brands such as Oppo and Vivo, which took the top three slots respectively in market share rankings for the second quarter, according to research group Canalys.

Data from Counterpoint Tech­nology, the market research company, shows Oppo surpassing Huawei in the second quarter to become the top-selling smartphone in China, with 22 per cent market share. Oppo and Vivo, largely unknown brands abroad, are both owned by BBK Electronics, based in the southern city of Dongguan.

In the previous quarter Apple came fifth in China, accounting for a market share of 9 per cent, just ahead of Samsung, according to Canalys.

China’s smartphone market grew 3 per cent in the last quarter, according to the group.

Research from PiperJaffray estimated that mainland China accounted for 15 per cent of Apple sales in the quarter, adding that part of the drop can be accounted for by an inventory drawdown and that the numbers “look worse than they are”.

Bryan Ma, analyst at IDC, the research firm, says Chinese consumers quickly tire of last year’s or even last month’s model. “One of Apple’s problems in China is its product refreshes . . . or lack thereof,” he says.

The fickleness of the Chinese consumer has already caused problems for rivals, which have also struggled to stay on top of the China smartphone market. Previous years have seen Samsung and Xiaomi topping the charts at some point only to fall back.

Crucial to staying relevant is to promise something new. Mr Ma says the worry for Apple is that supposedly leaked images of the iPhone 7 do not appear much different than the iPhone 6S. “Apple needs to make sure that the next product looks noticeably different from the previous version, as the physical appearance is critical in market such as China where iPhones are viewed as status symbols,” he says.

- Copyright The Financial Times Limited 2016