CELLPHONES: Local Challengers Nibble at Apple in China

Bottom line: Apple could lose its crown as China’s best-selling smartphone brand by the end of the year, as it faces growing competition from domestic names looking for a bigger slice of the high-end market.

China loses crown as top iPhone market

Global smartphone pioneer Apple (Nasdaq: AAPL) has just released its latest quarterly results, which as usual contain very selective bits of information about the China market that are revealing but make it difficult to draw very strong conclusions. One emerging trend appears to have Apple coming under growing threat from Chinese brands eying the higher end of the market. That’s my quick conclusion based on Apple’s admission that China fell to second place among its global markets in its latest reporting quarter, after briefly grabbing the top spot from the US during the previous quarter.

Of course everything is relative, and Apple still looks quite strong in China with iPhone sales in its Greater China market up an impressive 87 percent in its latest reporting quarter. (English article) But that said, there’s really no reason that the US should have retaken the top spot from China during the quarter, since both countries now receive their new iPhones at roughly the same time.

Apple’s strong China growth was fueled in large part by big campaigns into 4G by China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA), which collectively control about a third of the nation’s mobile market and only recently received 4G licenses. At the same time, the nation’s leading carrier China Mobile (HKEx: 941; NYSE: CHL) has probably been getting more aggressive with its iPhone promotions, even though it has been offering iPhones with its own 4G service for more than a year now.

Among other financials, Apple also disclosed that its latest quarterly revenue for Greater China reached $13.2 billion, more than double the $6.23 billion from a year earlier. On a global basis, Apple sold 47.5 million iPhones in its quarter ended in June, missing analyst forecasts for 48.8 million units, prompting some to say that the company’s iPhone sales may have peaked.

Now that we’ve reviewed these few data points, let’s try to understand what’s happening to Apple in China in terms of market position. The company is still clearly a formidable player, landing the spot as the market’s best-selling smartphone brand in last year’s fourth quarter and this year’s first quarter. (previous post) But Apple, whose biggest opponent used to be Samsung (Seoul: 005930), could now be coming under pressure from domestic Chinese brands that are trying to go upscale and escape the extremely overheated low end of the market.

Fast-Rising Huawei

In particular, I’ve been impressed by the growing momentum at homegrown Chinese telecoms giant Huawei, which earlier this week reported a return to accelerating revenue growth fueled by strong smartphone sales in the first half of the year. The company’s mobile devices chief said Huawei passed the important milestone of 10 million monthly smartphone shipments in May, and should easily exceed its target this year for 100 million shipments. That figure would bring it closer to Apple, which sold just over 100 million iPhones in the first half of 2015.

Others making a push at the higher end of the China market include ZTE (HKEx: 763; Shenzhen: 000063) and the up-and-coming Xiaomi, and recent market entrant LeTV (Shenzhen: 300104), which was traditionally a seller of smart TVs and online video services. Of course anyone can say they want to enter the high end of the market. But actually succeeding there is far harder, and I’m not at all convinced that anyone besides Huawei and possibly ZTE has the know-how and resources to make a serious play at that part of the market.

At the same time, it’s also important to note that Apple has been on a PR blitz over the past year to improve its relationship with Beijing, following a period of tense relations a couple of years ago. The company has announced a few environmental initiatives, and the is now rushing to double its number of Chinese iPhone stores by the middle of next year. Such moves will bolster Apple’s position with Beijing, helping it with regulatory issues and more positive media coverage. But at the end of the day its high prices could push more Chinese consumers to domestic brands, which are gaining a reputation as lower priced, high-quality alternatives.

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