SMARTPHONES: Apple Slows in China as Huawei Comes Nipping

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Bottom line: Apple’s China sales are likely to enter a new period of slower growth as the Chinese domestic smartphone market stalls and a growing number of higher-end buyers flock to the surging Huawei.

Apple faces long-term China slowdown

Everyone is buzzing about Apple’s (Nasdaq: AAPL) latest quarterly results, which show that sales of its iconic iPhones may have finally peaked and be set for a longer period of slow growth or even contraction. A key piece of that equation is the China market, where the company’s growth slowed sharply in the quarter due to fierce competition from a growing field of rising domestic competitors led by the surging Huawei.

As someone living in China, I can say with relative confidence that Huawei smartphones are indeed becoming increasingly common here on the streets of  Shanghai. The brand is still seen as distinctly Chinese, in contrast to the trendier but fast-fading Xiaomi that rose to prominence partly on its ability to escape the “made in China” image.

But Huawei’s growing reputation as a maker of high-quality, reasonably priced smartphones is drawing attention away from its “made in China” roots and giving the brand a growing aura as a status symbol. And as Xiaomi discovered in its heyday, image is quite important in face-conscious China, with consumers often buying phones as much for the image they convey as for actual quality.

That said, iPhones are still the clear first choice for the most image-conscious Chinese, which is why they often command prices that are twice as much or more as even the most expensive rival models. That drawing power helped Apple to post 14 percent sales growth for its latest reporting quarter in Greater China, which also includes Hong Kong and Taiwan. (English article; Chinese article)

The latest China growth was sharply slower than the nearly 100 percent growth in the previous quarter. But the new China figure was still well above the nearly flat growth for global iPhone sales during Apple’s latest reporting quarter. Apple didn’t provide China-specific iPhone sales in its latest results, but it’s probably safe to assume that figure was roughly in line with the 14 percent overall Greater China sales growth.

Of course this kind of sales data is often cyclical, and Apple and others frequently have stronger quarters and weaker ones based on new product releases. In this case the quarter really should have been a relatively strong one for Apple in China, since it released its latest iPhone 6s in late September here and thus the latest results should have included a big bump from early sales of the model.

Thus the fact that China sales growth was very so-so probably reflects a number of shifting factors in the local market that could point to slower longer-term growth. The biggest of those is the China market’s overall slowing growth, with analysts predicting smartphone sales will be flat or even fall slightly this year. That contrasts sharply with earlier years when the market grew at a breakneck pace to become the world’s largest.

Growth from Smaller Cities

What’s more, the strongest growth now is coming from smaller Chinese cities, where incomes are typically much lower than top-tier cities like Beijing and Shanghai. Buyers in such cities are far more likely to buy a cheaper model from a crowded field of domestic brands that often sell for the equivalent of $100 or less. And even the more face-conscious people in these smaller cities may be content to choose a Huawei model to show off their status.

That brings us back to the Huawei factor, which looks like the biggest wild card that could dictate how Apple does in the year ahead. Huawei impressed market watchers by passing the 100 million sales mark for the first time last year, making it the world’s third biggest brand, though still quite a ways behind Apple, whose unit sales were more than twice that figure.

While some might argue that Huawei could become another Xiaomi and flame out this year, I would argue the company’s rise looks a bit more solid due to its deeper resources that include a very strong product development team. Huawei may have difficulty continuing its recent growth rate of around 50 percent, but 30-40 percent is still quite possible. That means it could increasingly encroach on Apple by offering high-performance models that are far cheaper than iPhones.

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