With Chinese New Year upon us, I thought I’d focus on some observations on China related to smartphones and particularly Apple.
Apple’s growth in China has been modest but steady — until Q4 of 2014. Apple saw a more than significant increase in Chinese sales during the December quarter as evidenced by their revenue from the greater China area.
We may look back at Apple in China and view their presence there as “pre-iPhone 6 and 6 Plus” and “post iPhone 6 and 6 Plus”. Without question, the years prior to the 6 and 6 Plus were about laying the foundation for their strategy in the region. This included the opening of 17 stores to date (40 within the next few years), the localization of iOS for specific regional needs in China, the addition of all their major carriers including China Mobile, and the support of Union Pay for iTunes. All of these things were essential for Apple’s foundation of their ecosystem in China. Now that the groundwork is fully laid, we are seeing Apple’s presence in China take shape.
There has always been strong demand for Apple products in China but not for Apple’s ecosystem. Consumers there were getting iPhones largely on the grey market, jailbreaking them, and not investing in the Apple ecosystem. This was a risky proposition from a loyalty standpoint. Despite the allure of Apple’s brand, their longevity to succeed and grow in China is helped by the stickiness of their ecosystem. Ultimately, Apple does not want to just sell hardware to Chinese consumers. Yet that was what was happening prior to the things I outlined above and all based on the high appeal from an aspirational viewpoint of Apple’s brand in the region. However, things are changing and it appears the China ecosystem is gaining traction as well.
Now that Apple’s base in China has become large enough, local developers are realizing the same things many Silicon Valley developers already know — iOS is a better place for developers to monetize. The dynamics I have continually explained, that Apple has the most desirable customers who are willing to spend, drives this. Local app developers, and even local services companies, commerce companies, etc., are starting to cater to iOS customers in ways they previously haven’t before. While this is trend is still in the early phases, there is a shift on the horizon. Some of it has to do with China’s maturing consumers but it seems there are dynamics at play which are bringing iOS into its own as a desirable software platform and ecosystem. Meaning, Apple is appealing to Chinese consumers beyond just hardware and brand. This is key.
This chart shows the history of iPhones in China by usage. Prior to the ecosystem foundation, iPhone 4 and 4s (largely acquired by secondary and grey market sales) dominated usage. But now the entire shift is happening to new devices with deep ecosystem ties (jailbreaking is now less than 10%. It was over 50% at one point in time).
Highlighting three frequently talked about brands in China tells some key stories. Samsung once dominated China and their rise and fall is a useful case study specific to global strategy. Similarly, Xiaomi’s rapid rise to number one in China is another telling case study of regional success. As you can see, Apple’s trend line has remained steady in terms of sales in China for iPhones.
Samsung’s fall from number one in China to number five took just over four quarters. Similarly, Xiaomi’s rise from lower than the top five to number one took just over four quarters. Apple’s rise from the bottom of the pack to #2 took one quarter. Apple will very likely take the number one spot in the March quarter thanks to the Chinese New Year.
It was hard for many who did not study China to understand the massive upside Apple has in the country. Looking at every region we study, I’m not sure I can say this about any other area other than China at the moment. Apple will certainly increase their base in the US, possibly getting to 60% share, but the US has only a little over 300m people. The number of consumers in China Apple can likely appeal to is double that number and growing.
While the revenue chart above still shows US and Europe ahead of China, China will likely continue to grow and get closer to US. The US remains, in the short term, Apple’s largest market by revenue even though, and soon, China will be the largest market for iPhone sales.
China could be the Apple Watch’s largest market day one. I have quite a bit of luxury watch market data for the China region and while a huge number of very cheap watches get sold there, a large number of very expensive watches get sold there as well. The Apple Watch lines up with China’s gadget craze, particularly around mobile, and Apple’s aspirational brand appeal, all which lead me to believe the Apple Watch will not only sell well in China but will drive demand for iPhones even higher. I do believe the ASP of Apple Watch sales will be higher in China than any other country.
Some possibilities for Apple in China in 2015:
- Apple could sell more smartphones in China than Samsung
- Apple could be the number one or number two smartphone vendor in China for all of 2015
- While possible but somewhat doubtful, Apple could see China revenue be higher than the US towards the end of year (driven by Apple Watch revenue
- Apple could average more smartphones sales in China than any country (it will be a back and forth between China and the US in 2015)
The last point I want to make with regard to Apple in China in 2015 is a look ahead toward the end of the year. I have a feeling that, when the current iPhone 6 and 6 Plus get discounted in China to the $500-$600 range, whether through primary channels like carriers or secondary/grey market channels, Apple will see iPhones compete with smartphones in the $300-$400 range in China. This means those customers who may have spent $300-$400 may consider an iPhone 6 or 6 Plus in the $500 range within reach and continue saving. If this happens, Apple’s customer base could increase dramatically as the $300-$400 price range sees, on average, more than 40m shipments per quarter in China.
As our readers know, I update and share my data models for China regularly and Apple’s line in 2015 will be interesting to watch. Tim Cook mentioned on the last analysts call that many didn’t think they could do it in China. There is a similar narrative about Apple in India. While it is true the dynamics in India are completely different, I believe it is time to start focusing more on India and what Apple’s upside may look like there as well.