Why did Tim Cook and Apple fail to understand the Chinese smartphone market? Key sales targets were not reached, iPhone sales fell, and Apple was left to post a profits warning and post humbling quarterly results.
Tim Cook opens the Apple’s annual product launch, Wednesday, Sept. 12, 2018, at company headquarters in Cupertino, Calif. (Karl Mondon/Digital First Media/The Mercury News via Getty Images)Getty
Although the smartphone market in China fell overall, Apple fell further and fell faster than the baseline. While the Chinese market fell 9.7 per cent, iPhone sales fell by 19.9 percent.
Tim Cook has already laid out a number of factors that Apple consider to be drivers in the fall in sales; notably the lower carrier subsidies that increase the ‘over the counter’ price of the iPhone, foreign exchange rates, and the rising tensions between America and China. Cook laid these out in his letter to investors, noting that he attributed the poor Q4 numbers to the Chinese markets:
If you look at our results, our shortfall is over 100 percent from iPhone, and it’s primarily in Greater China. As we look at what’s going on in China, it’s clear the economy began to slow there for the second half. What I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy. We saw, as the quarter went on, things like traffic in our retail stores, traffic in our channel partner stores going down, the reports of the smartphone industry contracting.
I would suggest that the problem lies closer to home. The Chinese market changed in the latter half of 2018 and Tim Cook’s Apple either failed to spot the changes, or ignored them in the belief that iPhone sales would be bulletproof. Three key elements failed in China. All three should have been expected and addressed before a profits warning was needed.
Apple chief design officer Jony Ive (L) and Apple CEO Tim Cook inspect the new iPhone XR (Photo by Justin Sullivan/Getty Images)Getty
It’s important to realise that Apple does not have the same lock-in with iOS apps and IM through the iMessage platform in China that it has in Western territories. The real lock-in belongs to WeChat – if your phone does not have WeChat nobody is buying your phone. And as the service is cross-platform switching between Android and iOS is far less of a burden that many think it is.
That means Apple is in the same dog-fight as everyone else. Stripped of its iOS superpowers, Apple fights on a mix of raw specifications and how attractive the hardware is. And with Apple’s technology and design generally being a year or two behind Chinese manufacturers, the iPhone XS family looks tired and identikit. It does not stand out.
The Chinese market loves flagships, but doesn’t really do sequels or lower-priced versions of a leading handset. In that sense the iPhone X was a strong handset in 2017 – it was clearly the flagship, there was no other ‘X’ device and the lower-ranged iPhone 8 and iPhone 8 Plus were easy to pass over.
That wasn’t the case with the iPhone XS and XS Plus. While they were the ‘latest’ devices there was little to differentiate the hardware from the previous year’s flagships. Just as the iPhone 5S and 6S failed to light up the Chinese market, the iPhone XS also failed.
Apple’s plan was for the iPhone XR to take up the slack at a lower price point, but China’s love of flagships and luxury handsets meant the XR was never going to be a major hit. If Apple is trading on prestige alone, then who would buy the lower status handset?
Finally, the market for a large-screened high-priced smartphone is not infinite – there comes a point when it is saturated and the adoption curve will fall away into a ‘one for one’ replacement cycle. If the new handsets are not offering significant advantages over the previous handsets (and there’s not much between the iPhone X and the iPhone XS) then there will be little appetite to upgrade. Throw in Apple’s iPhone Battery Exchange program that gave millions of handsets a new life courtesy of a $29 battery and the available audience for the iPhone XS and XS Max was diminished.
Apple CEO Tim Cook presents new products, including new Macbook laptops, during a special event at the Brooklyn Academy of Music, Howard Gilman Opera House (Photo by Timothy A Clary / AFP) (Photo credit should read TIMOTHY A. CLARY/AFP/Getty Images)Getty
The Chinese smartphone market contracted in Q4 2018; the product mix in the iPhone portfolio was wrong; and Tim Cook’s team failed to understand how the territory required a different approach.
How Apple course corrects for the rest of 2019, and how it addresses these points in the 2019 handsets that will surely be announced in September will be key to reversing iPhone sales. Because without the iPhone gathering new users, there’s no user base to access the software and services Apple will be relying on for long-term growth.