SMARTPHONES: Apple Finds Its China Mojo as Xioami Moves Up

Bottom line: Apple should be able to extend its return to growth in China into at least one more quarter, while Xiaomi should also be able to continue posting strong double-digit growth for the next year.

Apple (Nasdaq: AAPL) has just released its latest quarterly results that show China is back on a growth track, quieting skeptics who had said its latest iPhone was debuting to mostly snoozes in the world’s largest smartphone market. On a broader basis, IDC has also just announced its global figures for third-quarter smartphone sales, showing Huawei continues to creep up on Apple and could well take the global No. 2 spot from its U.S. rival over the next year if current trends continue.

Last but not least is China’s own Xiaomi, which is catching people’s attention again with the strongest growth of any global players in the third quarter, consolidating its position as the world’s fifth largest player. It’s probably too early to say that Xiaomi’s comeback story has legs. But the company is the only one posting triple-digit growth among the top 5 in the latest quarterly results, a distinction previously reserved for Huawei and Chinese rival  Oppo.

Let’s begin this smartphone round-up with Apple, which has been on shaky legs in China these last couple of years as its image starts to fade. The company said it has officially returned to a growth track in China, with its Greater China revenue rising 12 percent to $9.8 billion in its latest reporting quarter. (company announcement)

I had to do quite a bit of searching to find the last time Apple reported growth in China, and finally discovered the last time it did so was in the final calendar quarter of 2015. That means this is the first growth for Apple in China in nearly two years. The bigger story is that Apple has faced growing competition for its high-end smartphones from a noisy batch of homegrown players, most notably Huawei but also names like Oppo, OnePlus and Smartisan.

Of course wanting to be a high-end player is one thing, and actually being one is another. But some of these companies do finally seem to be finding their way into Chinese consumers’ good graces, in a market that is the world’s largest with more than 100 million units shipped each year. Apple’s comeback is no doubt due at least partly to coming off a low base, and also the release of its latest iPhone 8 models.

The upcoming launch for the iPhone X could help it stay in the China growth column for at least one more quarter, as that’s been getting a bit of positive buzz. After that, however, it could fall back into contraction if it doesn’t come out with some newer, more compelling products.

Xiaomi Comeback Marches On

Next there’s the bigger-picture global numbers from IDC, which show the order of the top 5 smartphone producers remained unchanged in the third quarter from the second. (press release) Samsung (Seoul: 005930) and Apple have become staples on the list at first and second, with Chinese companies typically taking up the third, fourth and fifth spots. The most commonly seen names in those slots are Huawei, Oppo and Xiaomi.

Huawei and Oppo were posting high double-digit and even triple-digit gains for a while, whereas Xiaomi was actually posting losses following its meteoric rise a few years earlier and equally rapid fall. But now the tables have turned, and Huawei and Oppo held on to their third and fourth positions with modest 15-20 percent growth.

The big story for the quarter was Xiaomi, which saw its unit shipments double, accelerating from about 60 percent growth in the previous three months. That allowed it to double its global market share to 7.4 percent, closing in on Oppo’s No. 4 position at 8.2 percent. IDC pointed out the biggest catalyst for Xiaomi was the fast-growing India market, where it is already the second larger player after only Samsung.

But the bad news for Xiaomi is that it is making most of its global gains on a cheap, low-end strategy, which will help it log sales but not much in terms of profits. It recently rolled out a new higher-end model that got generally positive reviews, but probably will generate limited sales. It also appears to be strengthening its ties with Microsoft (Nasdaq: MSFT), whose CEO Satya Nadella paid a visit on the company during a trip to Beijing this week. (previous post)

At the end of the day, I’ll say I’m slowly becoming a believer in the Xiaomi turnaround story, which has been built upon more realistic expectations, a stronger traditional retail network and slow, more focused approach to the global market. I would expect the company to continue posting strong growth for the next year, though it may be tough to keep up the triple-digit expansion.