Apple Losing Its China Luster?

Apple’s sales growth stagnates

Chinese media are buzzing over the fact that tech giant Apple’s (Nasdaq: AAPL) China sales slowed sharply in the first 3 months of 2013, raising the question of whether its days of strong growth in the market may be finished. Quite a few factors are at play in this case, including some short term issues like difficult comparisons from a year earlier. But other longer terms issues are also at play, most notably negative publicity which has tarnished the company’s “cool” image. Apple will need to address these latter issues in China over the next year, since continued image erosion could easily put the company on a long-term downward track.

Let’s take a look at the numbers, which are slightly contradictory based on the 2 media reports I saw but still paint a similar picture. One report said Apple’s Greater China revenue grew by 8 percent to $8.2 billion in the first 3 months of the year (Chinese article), while another said it grew 11 percent to $8.8 billion. (English article) Both of those numbers represent about one-fifth of Apple’s total revenue worldwide, making China its second largest market.

Regardless of which number is correct, both mark a sharp slowdown from the previous quarter when Apple’s China revenue soared 67 percent after the launch of its iPhone 5 in December. (previous post) Apple launched its latest iPhone 5 in China months after the global launch, meaning the product lost much of its hype by the time it officially came to China. Accordingly, I would expect that iPhone 5 sales were probably strong in December, but then probably dropped off sharply after that due to lack of buzz.

At the same time, Apple suffered a couple of challenges in the first quarter that contributed to its weak showing. One of those was a one-time issue, since one of China’s 3 major telcos, China Telecom (HKEx: 728), formally began selling iPhones in China during the first quarter of last year. (previous post) That means Apple probably saw a big one-time jump in China sales with the addition of this major new sales partner last year, artificially inflating sales for that period.

But Apple followers will also know that the company faced a major challenge in China starting in mid-March, when state broadcasting giant CCTV aired a report criticizing some of the company’s after-sales service policies. (previous post) The People’s Daily, the official newspaper of the Communist Party, joined the assault by printing a series of critical editorials, culminating with one that blasted Apple for its “unparalleled arrogance”. The brouhaha resulted in a rare apology from Apple’s CEO Tim Cook, which largely ended the media firestorm.

Many Chinese consumers were skeptical of the media reports, since most realize their media are all state-controlled and are often used as tools for the government’s political agendas. Still, this series of attacks has undoubtedly hurt Apple’s reputation in China. I can personally sense that the company has lost some of its “cool” image among the young, urban Chinese in Shanghai who were some of its biggest fans willing to pay big premiums for its iPhones and iPads.

Clearly Apple is suffering with an image problem in China, and it needs to do something quickly to restore the excitement and “cool” factor if it wants to return to stronger growth over the next 2 years. I’ve previously said the company could improve its image by opening more Apple stores and an R&D center in China, which it appears to be doing. Perhaps it could also become a bit more friendly with the Chinese media, reversing its tendency to disdain the media in most other markets.

I can’t say for certain how the company can repair its tarnished image. But if it doesn’t move more assertively soon, Apple could soon see its China sales stagnate over the long term, as consumers decide they can get better value from lower-cost rival products.

Bottom line: Apple needs to move aggressively soon to repair its China image or risk seeing its sales stagnate in the market.

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