Apple’s cut in its sales forecast was blamed almost entirely on the economic slowdown in China, but the real picture is probably far more complex, with high prices, cultural differences, fierce competition and consumers keeping their phones for longer all causing problems.
Its chief executive, Tim Cook, said falling sales of iPhone, iPads and computers were primarily due to the “magnitude of the economic deceleration, particularly in greater China”.
While the downturn in China is a factor, Apple faces challenges in the west too. Smartphone ownership in the US and EU has reached saturation point and convincing people to upgrade from models that still work is far harder than attracting first-time buyers. People are holding on to their old iPhones for longer than ever. The average time people keep hold of them has risen from 18 months to up to three years.
That has meant Apple finding long-term revenue services such as the App Store and Apple Pay, and increasing the purchase price of the phones.
The X factor
The iPhone X raised the price ceiling of a top-end mainstream smartphone to £1,000 in 2017, and a year later the XS Max pushed it up to as much as £1,449.
“In mature affluent markets such as the US, in western Europe and South Korea, there is still a willingness to pay a significant premium for an iPhone,” said Ben Wood, head of research at CCS Insight.
But the higher prices have undoubtedly hit more price-conscious consumers. “The bulk of the iPhone user base may not be ready to shell out $1,200+ for base iPhone models which used to cost $699 just a few years ago,” said Neil Shah, a partner at Counterpoint Research. “Not all of the hundreds of millions of Apple iPhone user base are affluent.”
The increasing cost of iPhones may lead to even longer replacement cycles. Apple is clearly aware of the problem, offering trade-in discounts at the end of 2018. The firm has also been pushing consumers towards instalment plans in the US.
Increasing prices and slower improvements in capability are far greater problems for Apple in China, which last summer accounted for nearly 20% of the firm’s revenue, than in the west.
The lock-in associated with Apple-exclusive services such as iMessage, Apple Photos and even the App Store, means the iPhone is not just another interchangeable smartphone in the US and many parts of Europe.
That isn’t the case in China. No one smartphone dominates, and services are device agnostic. WeChat, for example, is far more than just a communications medium and social network like Facebook and WhatsApp; it is where 1 billion Chinese go for news, access to government services, to conduct business, pay for goods and services, and even to order a taxi.
“Unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat,” wrote the technology analyst Ben Thompson in 2017. “For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.”
Thompson’s view is just as true now. There is little advantage in China to running iOS over Android on your phone. WeChat runs just as well on either, levelling the playing field.
Apple is still premium-brand luxury, but it is only as good as its last smartphone. In China it comes up against local rivals such as Huawei, Oppo, Vivo and Xiaomi which not only match but exceed the iPhone, and at a far lower price. Huawei is now the second biggest smartphone maker in the world and its devices can cost as little as half as much as Apple’s.
“Chinese brands are outcompeting and out-marketing Apple on design, mobile-first innovations and value ,” said Shah.
He expects demand in the Chinese smartphone market to have shrunk by 9%-11% in 2018, but the iPhone to have shrunk by 15%-17%.
It is not all doom and gloom for Apple. Ryan Reith, of the analysts IDC, said that while the firm has lost market share, primarily to Huawei, “Apple still has 73% of the premium segment ($600+) in China”.
But the biggest issue for Apple is the importance of China to its future growth. Having effectively been priced out of India, which is one of the world’s smartphone markets that is still growing, China is crucial – and as a trade war between Washington and Beijing looms, Apple’s problems could get worse.