Talking Point, Telecoms

Apple’s new core customers

China is becoming more important to Tim Cook than the US

Customers look at Apple Watches after the device went on display at an Apple Store in Hong Kong

Watch out: Chinese tourists admire Apple Watches at a store in Hong Kong

For years Chinese consumers have joked that an iPhone is so expensive that you need to sell a kidney to afford one (sadly, a teenager tried to do exactly that in 2011). But now the price is about to fall, it seems.

In April, Apple launched an iPhone trade-in programme with Foxconn, the biggest contract manufacturer of Apple products. How it works is that retail staff at Apple outlets will assess an iPhone’s condition before offering store credit towards purchasing new devices. Foxconn will then buy the older phones back from Apple, repair them if needed, and sell the reconditioned smartphones (at about half the price of the brand’s new models) through its own e-commerce sites as well as other popular internet shopping platforms.

As a testament to the iPhone’s enduring appeal among Chinese consumers, demand for the second-hand handsets was so strong that Foxconn said they were sold out within two hours.

The company didn’t disclose how many were sold, but the traffic on the Foxconn sites was so overwhelming that they crashed.

Irate Apple fans were soon complaining that Foxconn should stick to what it does best – assembling gadgets instead of selling them. But the popularity of the programme yet again reflects the voracious Chinese demand for Apple products. Analysts are now asking: is it only a matter of time before China becomes the largest market for the tech giant, surpassing even the United States?

Smashing records, again

Helped by strong sales of the new iPhone 6 and iPhone 6 Plus over Chinese New Year (in February), Apple saw its worldwide revenues reach $58 billion in the quarter ending in March. Sales in Greater China (including Hong Kong and Taiwan) also beat expectations, rising 71% to $16.8 billion. That rate of growth is much faster than the global increase in revenue of 27%, while the China market has now surpassed Europe as the company’s second-largest (sales in Europe were $12.2 billion). Also significantly for Apple’s future, the number of iPhones sold in China surpassed sales in the US for the first time (though the company did not offer specific figures).

Tim Cook, Apple’s chief executive, called the latest set of financial results the “best March quarter ever”. They also increase the chances that his 2013 prediction that China would soon become Apple’s largest market will ring true. “Everything you look at in China was extremely good,” says Cook. “I’ve never seen as many people coming into the middle class as they are in China and that’s where the bulk of our sales are going.”

Chinese consumers are not just buying iPhones. The iPad is also an “extremely good business over the long term,” according to Cook, with sales hitting an all-time high in China, while sales of Mac computers also rose 31% during the period.

Aren’t sales of luxury goods supposed to be slowing?

While the tech giant’s success in China has been well documented in the past (see, for example, issue WiC119 ‘The People’s Republic of Apple’, for one of hundreds of articles we have written mentioning Apple’s business in China), what’s impressive is how the brand still manages to sustain sales growth despite Xi Jinping’s anti-corruption crackdown.

Apple, after all, is considered a luxury brand. In a recent survey from the Hurun Report, it was voted as a favourite gift among the wealthy, ahead of Louis Vuitton, Gucci, Cartier, and Bvlgari.

While luxury items in general have experienced a dramatic slowdown in sales over the past year, Apple’s financial results in China have been more than robust. Jing Daily reckons that Apple has managed this because its product range successfully blurs the line between opulence and technology. The website says this means that the tech firm can “get away with far more than any other luxury brand in the market”. A photograph in a newspaper of a Party official holding an iPhone, for instance, is not going to rouse the same attention as if he is flaunting a Patek Philippe timepiece (see WiC123 on why wearing expensive watches has proved the undoing of a number of local government officials).

It certainly helps that consumers don’t seem to want to buy anything other than premium products from the tech giant. When Apple released the more affordable iPhone 5C to target more budget-conscious users, it flopped miserably in China, lagging behind the premium model, the iPhone 5S. In fact, sales in China deliver Apple’s best profitability, because a larger portion of its revenue mix is higher-margin iPhones. In other markets Apple sells a more diverse, lower-margin mix (iPods, Macs, and iPads). Eventually, those higher margins will drop closer to American and European averages, but then the Californian superbrand can fall back on revenue growth, as millions more consumers start experimenting with different types of Apple gadget.

Can the iPhone stay dominant?

Sceptics argue that the proliferation of cheap and locally made Android phones will render Apple’s current growth rates unsustainable. The success of Xiaomi – currently the world’s third-largest smartphone maker – has also encouraged new players to try their luck in the industry. Online video provider LeTV is launching its own smartphone models, for instance. Even Gree, the air-conditioner manufacturer, has announced a foray into the business.

Moreover, after years of explosive growth, smartphone sales in China have started to reach a plateau. Statistics from the Ministry of Industry and Information Technology reveal that shipments were down 8.2% in 2014 from a year ago to 389 million units. That figure represents a hefty 86% of all handsets shipped in China last year, pointing to the conclusion that the majority of handset buyers are already smartphone users.

The trend is reverberating through the sector. Samsung is in crisis mode, for instance. In the first quarter of the year, the South Korean firm saw its market share in China slip out of the top three (Xiaomi led the pack, followed by Apple and Huawei). 21CN Business Herald says it is the first time in three years that Samsung, which came in fourth, wasn’t in the medal positions. (In a move that suggests Samsung’s heyday in handsets could be over, its management has announced it will bulk up its semiconductor business, which supplies the memory chips to smartphones. Tellingly, that business surpassed its mobile division last year as the main profit generator. Samsung says it will spend $15 billion to open a new semiconductor factory in South Korea, likely in 2017.)

Then again, new players in the industry remain more hopeful. Zhou Hongyi, chief executive of software firm Qihoo 360, which unveiled its first smartphone this week, told Sina Technology that he doesn’t think it’s too late to join the chasing pack. Zhou says that consumers – especially younger people – change their phones approximately every year and a half. That means that hundreds of millions of people are in the market for a new handset every year or so.

Enter the Apple Watch

Sustaining some of Apple’s supercharged success in China will hinge on the reception of its Apple Watch, which is expected to launch there next month. If grey market activity is anything to go by, Apple already has another winner. Southern Metropolis Daily is reporting that the watch has become the most smuggled item across the border from Hong Kong, where it first went on sale last week.

“Apple is the only technology company that’s able to bridge the technology and luxury goods markets, and that’s going to serve it particularly well when it comes to the watch,” Jack Dawson of Jackdaw Research told the Financial Times.

For more evidence, look no further than the pre-order figures for the Apple Watch Edition, a version of the product made with 18-carat gold and costing Rmb12,800 ($2,000). Already available for pre-order in China, the range sold out among consumers in just half an hour.

“I think China is going to be one of the biggest, if not the biggest, market for the Apple Watch from day one,” Ben Bajarin, the director of consumer technology practice at Creative Strategies predicted in an interview with the Financial Times.

The success of the Apple Watch will also give China Mobile a boost as the world’s largest mobile carrier is going to be one of the key sales channels for the gadget. The potential is promising: China Mobile boasts 90 million 4G users, out of a total subscriber base of 806.6 million. Those clients might want the new gadget too. “China Mobile would be able to target more high-end 4G customers by bundling the Apple Watch as an accessory to the iPhone under a tariff plan with additional services,” says Ricky Lai, a research analyst at Guotai Junan International.

With Apple now dominating on so many fronts – smartphones, tablets and smartwatches – how critical is the China market to its future success? “Rather than saying that Apple is taking over the world, China is the biggest reason Apple has the confidence to take over the world,” says cnBeta, a Chinese tech portal.

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