SMARTPHONES: Is Apple’s Price Cutting Enough to Salvage China?

Bottom line: Apple will continue discounting its iPhones in China to stop its sinking market share, which could slow but not halt its decline in the face of growing competition from the likes of Huawei.

Following a break of a month, I’m returning to my writer’s seat with discussion of the China outlook for tech giant Apple (Nasdaq: AAPL), which has turned to a very un-Apple-like strategy of discounting its products in the world’s largest smartphone market. China has been a fickle place for Apple, at one point accounting for nearly a quarter of the company’s global sales, as brand-conscious Chinese paid big premiums for trendy iPhones. That’s hardly the case now, with China accounting for just 15.6 percent of Apple’s total sales in its last quarterly report.

Apple’s steadily eroding position has led the company to take the unprecedented step of starting to lower prices on its iPhones via promotions with its retailing partners. Such a discounting strategy hardly seems suited to Apple, and looks more like something we’d see from the many low-end models that now dominate this market.

So the big question becomes: Will Apple ever be able to recover its past glory days in China, or is the company destined to become another Nokia or Motorola, which also once dominated the market? In my view the answer is probably that Apple is destined to go the way of the dinosaur in China over the next decade, though it may be able to slow down that slide if it lowers its premiums.

From here let’s step back and take a look at the market from the broadest perspective, and how it has changed over the last few years. Apple got a lock on the global smartphone market when it first revolutionized the product with its touchscreen iPhones a decade ago, and it quickly copied that success in China a few years later. But that share has been gradually eroded since then as a growing number increasingly savvy competitors have developed ever-improving products running the rival Android system.

That’s where China comes in as a slightly different beast, since the big majority of those fast-rising rivals are based in China, which also happens to be the world’s largest smartphone market. In the earlier days brand-conscious Chinese consumers went out of their way to shun domestic brands, presuming that anything made by a Chinese company was automatically inferior to products from Western rivals.

No Long the Case

But that’s no longer the case, especially with the rise of China’s Huawei and some smaller players like OnePlus, which can increasingly make high-quality smartphones that can do almost everything their iPhone counterparts can. Apple was slow to wake up to that reality, and continued to charge big premiums for its phones, which often cost double or more than the highest-end models from Huawei.

Now it seems Apple has finally woken up and realized its name alone doesn’t merit such a big markup anymore. The company has been slashing prices these last few months by letting its biggest retail partners do the once-unthinkable and sell the phones for a discount to what they cost through Apple’s own official channels. (English article) In  an example that looks quite typical, the popular Tmall e-commerce site was recently offering the top-of-the-line iPhone XS Max for 10,799 yuan ($1,600),  representing a discount of about 15 percent from the official price.

Those cuts are having at least some impact, which isn’t too surprising. One of my local friends recently asked me to buy him an iPhone on a trip to the US, since US prices are typically much lower than in China. But then he abruptly stopped me a few days later, saying he’d seen the model he wanted advertised online in China for roughly the same as the US price. From a geographic perspective, that kind of sale will now get recorded in China, rather than the US, which should help Apple’s local sales.

But where does Apple go from a longer-term perspective? This kind of appeal to bargain hunters hardly suits Apple’s image as a premium name in brand-conscious China. That means it will probably have to cut its traditionally high markups for future products. That could help it regain some market share over the shorter term, but will also probably fail to halt the gradual migration to increasingly similar Chinese brands. It also won’t help Apple’s profit margins.

At the same time, Apple’s movement to more services, which the company is pursuing as a global strategy, seems unlikely to find much traction in China. This particular market is notoriously closed to foreign companies for any kind of entertainment offerings like audio and video. Collection of personal information by a foreign entity is also a sensitive matter. For those reasons, I really don’t see services becoming a big bread-winner for Apple in China, which could sharply dampen its future growth prospects here.