Apple in China: Dissecting Problems That Led to iPhone Woes
Apple has a China problem. But the narrative the company tells might not tell the whole story.
On Wednesday, Apple CEO Tim Cook wrote a letter to investors revising downward the company’s revenue guidance for its first fiscal quarter from an expected range of $89 billion to $93 billion to $84 billion now. While I’m not one to believe it’s the biggest of problems, there are some who say it’s the latest sign of real trouble inside Apple.
For his part, Cook acknowledged softness in the iPhone division. And he specifically said that China was largely to blame. More than 100% of Apple’s revenue decline happened in China, Cook said, and a combination of a weaker-than-expected Chinese economy and trade problems between China and the U.S. combined to create issues.
The fact, however, is that Apple (AAPL) has made some big mistakes in China in recent years. And although some major market factors arose last quarter, much of what’s happening to Apple in China goes beyond Donald Trump’s trade war.
If you’re keeping score, Apple’s China problems didn’t just begin. In fact, stagnation has been a problem for some time now.
Back in the fourth quarter of 2014, or Apple’s first fiscal quarter in 2015, China revenue stood at $16.1 billion and accounted for 22% of the company’s global revenue. A year ago, Apple’s China revenue was $18 billion, or about 20% of its revenue. During Apple’s fiscal fourth quarter, which includes the third quarter of 2018, China revenue was $11.4 billion, or about 18% of its global revenue.
Meanwhile, the Chinese government has been difficult for Apple to deal with. And in some cases, Apple has capitulated to its demands, angering customers and causing the company problems abroad.
Look no further than Apple’s decision in 2017 to remove VPN applications from its Chinese App Store as a prime example of that. VPNs are widely used in China to circumvent the company’s Great Firewall. Apple’s decision was widely criticized both inside China and elsewhere. And some viewed it as a decision to maintain relations with the Chinese government to the detriment of its customer base.
In China, Apple also finds itself in a far more dangerous environment than it might like. As a feature in The Verge illustrated last year, Apple copycats are everywhere in China. Chinese companies build devices that are near-clones to the iPhone and come with software that works in much the same way. But those devices are also much cheaper than the iPhones and often get sympathy from the Chinese government and courts. Along the way, Chinese consumers buy them in droves and Apple is left to accept that and move on.
But more than anything, Apple appears to be tone deaf on price. Like it or not, the iPhone is really expensive. And in China, where the economy is in trouble and the middle class is finding less cash to spend, the company’s decision to price its iPhones so high makes its handsets far less appealing.
The simplest move for Apple last year when it unveiled its iPhone XS, iPhone XS Max, and iPhone XR would have been to keep its cheap, budget-friendly iPhone SE on store shelves. It didn’t. And people around the globe were forced to either spend hundreds of dollars more on a new iPhone or stick with what they have now. At $350, the iPhone SE was a bargain. At $1,099 to start, the iPhone XS Max is anything but a bargain.
This is all not to say that Apple isn’t suffering from problems in China that relate to trade and a slumping economy—it is. But Apple’s China problems have been in the works for years. And many of them have been self-induced.