A First for Apple in China

It has been a while since I’ve written a post on what is going on with Apple and the iPhone in China. I have recently come across and updated recent data points I’ve seen from the region and want to make a few observations.

Tracking the iPhone installed base in China is notoriously difficult since a healthy base of Chinese iPhone customers existed before Apple was officially present, both in retail and with carrier deals like China Mobile. Apple had a large and vibrant installed base which was fueled entirely by the grey market (unofficial channels, or purchased outside the country and brought in). Because we can’t track the sales of these devices, it was nearly impossible to estimate the size of the base. In early 2014, I had a theory, which I developed from a series of website-based tracking tools, that the iPhone installed base in China was north of 100 million even before Apple was officially present. People thought I was crazy and I felt like I was. How in the world could a region grow to over 100m units which, at the time, was more than any other country (including the US) solely on the back of unofficial grey market, street vendors, and imports from offshore purchases? Looking at some recent data, it appears I was correct and Apple’s base was in the 100 million range as of early 2014. Someday, a dedicated analysis will need to exist on how such a large customer base could be built solely from unofficial channels and what it says about China in particular as a market. Given many of these devices were acquired unofficially, the Apple App store was not quite present, and many of these devices were “jailbroken”, it is likely even Apple had no idea how large their customer base in China was at that time.

Fast forward to today and I see this chart which shows active devices in China as tracked by app store and website visit metrics.

china_base

This chart, and the tracking service that created it, is estimating there are ~280m iPhones and iPads in China being actively used on a monthly basis. This chart indicates most of that number is iPhones but, from a range of other tracking network data I have, it has to include iPads. It would equate to around 28% of the now one billion active mobile devices (including tablets) in use in China. The iPhone installed base is likely around or just a bit north of 200 million, keeping Apple’s smartphone share alone at around 28% of all smartphones in use. This 200+ million number of iPhones in use is greater than even the most aggressive installed base estimates from the region I’ve come across. But, given my points about the grey market, I find it plausible this is the case given the recent and updated data.

Apple saw aggressive growth in China at the end of 2014 with the release of the 6 and 6 Plus. As I watched network statistics of active devices on a monthly basis in China, I found it fascinating the 6 (4.7″) iPhone was the volume seller. Given 5″ and larger phones were becoming the norm in China up to that point, I assumed the 6 Plus and its larger 5.5″ screen size would be the volume leader. However, with both the 6 and 6s cycles, the smaller 4.7″ iPhone had the larger share of the mix. That has changed with the 7 and 7 Plus cycle. As the tracking metrics by active device will show, during this cycle, the 7 and 7 Plus are nearly identical in their adoption in mainland China.

china_mix

This is the first time since the 4.7″ and 5.5″ form factors have been released in China that the Plus is tracking in line with the 4.7″ model and is actually on a faster growth pace. It could very well pass the 7 next month and lead the mix for the first time. This tells me a few key things about how Chinese consumers view the iPhone.

First, there was not enough differentiation between the Plus devices, other than screen size, to get customers to spend the additional money to have what they perceive as “the best”. Both devices were basically the same in Chinese consumers eyes and in a market where status tied to iPhone ownership is strong, you want to be viewed as having the best and most cutting edge. In consumers’ eyes, that aspiration was relatively equal among the two products. So those who scrimped and saved to buy iPhones but couldn’t necessarily afford one went with the lower cost model. That is all changing with the 7 Plus and the dual camera system as it makes the 7 Plus stand out as clearly the best, most cutting edge of the two. It was really that simple to drive a mix shift in China.

The second thing is, if Apple moves to an entirely new design and/or technology function with the iPhone 8, we are going to see a massive cycle in China. The 6S (and even this cycle with the 7) is relatively weak by comparison. It means many Chinese consumers with a 6 or later are holding onto their device longer since the one they have still performs the job they hired it for. It also includes elements of aspiration and status but also function as well. There is undoubtedly pent up demand in China as many consumers’ iPhones are beginning to age. They are not leaving the iPhone for cheaper Android brands, as some analysis assumes, but rather holding onto them longer. The price of the iPhone is a big reason and, while they will upgrade to a new one and scrimp and save to do it, they simply can’t do it every two years. So they will pick their upgrade cycles intentionally and all signs point to a big swing in China come fall of 2017.

Now that we have more than two years of solid data on Apple’s Chinese customer base, I’m getting more confident we understand their patterns and behavioral drivers. Apple dominates the top tier-2 cities of China and the new brands you are hearing like Vivo and Oppo are growing at the expense of Xiaomi and Samsung in tier 3-4 cities. Understanding the difference between the regions of China is key to understanding the market which, like many other markets, is so large it actually functions like several markets not one. While we have a good handle on Apple’s prospects and consumer cycles in tier 1-2 cities, it will be interesting to see what happens for them in tier 3-4 cities which is where the new customer growth is going to come from. Those cities are just now starting to enter the purchasing landscape and the competition for Apple is stronger in those areas with local players than it was in tier 1-2 cities during their big growth cycle. We will need another year of data on those lower tier cities before we see what true patterns emerge. It will be interesting to see if Apple’s thesis is correct with the tier 3-4 Chinese cities as it was with tier 1-2 markets.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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