China Consumer, Talking Point

Hoping for the X factor

Apple bets new iPhone models are the answer to its faltering China sales


Sizing them up: Apple is counting on new iPhone models, including the X (middle), to rekindle China revenues

Feng Xiaogang’s Cell Phone was China’s most talked about movie of 2005, starring Fan Bingbing as the archetypal mistress. Her lover communicates with her on his mobile phone, but is undone when his wife gets hold of this most personal of devices and soon finds messages evidencing his infidelity.

According to the Chicago Tribune the film was so powerful it led many couples to ask questions about their partners’ loyalties. “China’s ever vibrant internet chat rooms spout tales of couples fighting or breaking up after seeing the film,” the US newspaper wrote 12 years ago. “Newspapers detail a Tianjin woman who insisted on checking her husband’s cell phone messages after they left the cinema, a challenge that reportedly so enraged him that he cracked her over the head with his handset, landing her in the hospital.”

(As an aside, Cell Phone also emphasised for WiC just how much China’s cinema industry has mushroomed in that 12-year timeframe. In 2005 it was the top film and earned Rmb50 million; this year’s top film Wolf Warrior 2 has already made Rmb5.65 billion, or $857 million, and won’t end its theatre run till October 28.)

Fast forward to the present day, and the launch of a new phone has once again caused a stir among married couples in China. This time it is the Apple iPhone X (i.e. 10) and the facial recognition technology that allows it to be unlocked. After all, it’s a far more powerful device than the phone used in Feng’s film and consequently could house a lot more compromising data about the straying spouse.

So the jokes have been flying thick and fast about jealous wives scanning husbands’ faces while asleep – so as to open their phones and comb through his WeChat messages.

In fact, funny though that is, Apple has already made clear it would not technically be possible. The iPhone’s new facial recognition technology only activates when the owner’s eyes are open.

Humour aside, so much was written online about the launch of the new iPhones X and 8 that in the days after Apple boss Tim Cook unveiled them they topped the ‘hot headlines’ list on Sina Weibo, China’s Twitter equivalent.

But will all that online chatter and publicity help the phones to sell in quantities big enough to reverse Apple’s flagging performance in China? For Cook, that is the critical question.

Why is Apple facing tougher times in China?

What a difference two years can make. In 2015, such was the demand for Apple’s new outsized iPhone 6 Plus that China Daily reported how two desperate men in Yangzhou attempted to finance its purchase by trying to sell their kidneys to an organ trader.

A couple of years on and the brand’s market share in China has fallen to 7% from 16.5% in 2014, says the Wall Street Journal. And sales have declined for five consecutive quarters in the country after an outstanding 2015.

In 2015, Chinese consumers were literally flocking to buy iPhones: rated the country’s most prized luxury gift. Local buyers were particularly enamoured with the new gold colour (denoting wealth) and the outsized proportions (China’s more conspicuous consumers like their purchases big and showy – witness how large the faces of luxury Swiss watches have become over the past decade).

The iPhone 6 was certainly large for Apple’s shareholders. Chinese shipments jumped 78% from 29 million in 2014 to 51 million in 2015. This was also partly due to a new marketing tie up with China Mobile – by far the country’s largest telco – and this saw China leapfrog Europe as Apple’s second biggest market.

European sales, meanwhile, went up far more slowly from 29 million to 34 million, while US sales had a solid 36% jump from 52 million to 70 million shipments.

And then the momentum ebbed in China. US sales also slipped in 2016, falling 10% to 63 million. But they have been rebounding this year and analysts expect them to finish 2017 up about 15%.

In China, sales similarly dropped 11% in 2016, but so far (and before the launch of iPhone X) there have been no signs of a revenue turnaround in 2017.

What happened?

In some respects, Apple was a victim of its own success during 2015. The strength of that year’s Chinese sales figures, made 2016 and to a lesser extent, 2017 a very hard act to follow, since they had a high base effect to contend with.

But as almost every newspaper and financial analyst has pointed out, Apple has also been under pressure from domestic competitors, particularly Huawei, which has been eating into its market share at the upper end of the price bracket.

At the end of 2016, Huawei had a 16.4% market share in China (sales were up 30% year-on-year), although it only ranked second overall to Oppo on 16.86%. Third was Vivo on 14.8%. According to more recent research, Huawei increased its share in the Chinese market to 21% in the second quarter of this year (roughly double what it was three years ago), and during the period Xiaomi has also made a comeback, overtaking Apple and pushing the American firm further down to the fifth spot.

The strength of local handset makers has proved a challenge to Apple’s dominance, particularly as their handset’s technological specs have increasingly rivalled the iPhone’s own (Huawei included a Leica camera, for instance).

Additionally, Chinese consumers aren’t locked into Apple’s ecosystem in the same way as many Western ones. iBook and iMovie, for example, were banned by the government over a year ago. Many local consumers do not subscribe to iTunes or Apple TV either. With less of their data anchored to Apple’s ecosystem that makes it a lot easier for Chinese iPhone users to ‘defect’ to alternate brands, most of which run variants of the rival Android operating system.

Then there is the dominance of two local internet giants, both of which have a greater influence over consumer’s lives than Apple faces in many other markets.

A good example here has been the abject failure of Apple Pay to gain traction in the Chinese market (see WiC356). The Beijing Metro did not include it in its new payment system, while the dominance of Alibaba’s Alipay and Tencent’s WeChat Pay has pretty much left Apple Pay stillborn.

Indeed, Apple bosses are realising that a killer app in China trumps a killer phone. Tencent’s ubiquitous social media platform WeChat has become such a core part of the lives of its 965 million users, that loyalty to it surpasses that to any handset device.

Thus when Apple took the decision to take on WeChat by insisting on getting a financial cut of the platform’s tipping functionality (where users can use WeChat Pay to ‘tip’ a content provider they like), Tencent retaliated swiftly: the Chinese tech giant eliminated the function from the app’s Apple iOS version but retained it on its far larger base of Android-based apps (see WiC364). Worried Cupertino executives soon realised WeChat loyalists were more likely to switch to a rival smartphone that worked more smoothly with Tencent’s platform than stay loyal to their existing iPhone – a situation that may have further soured Apple’s already dwindling market share this year.

Now a truce of sorts looks to have been called. Last month a photo circulated on the internet of Tencent’s top management team – including its founder and boss Pony Ma – visiting Tim Cook at Apple’s new campus in California. And Apple has reversed course on the tipping function, ceding defeat to the Chinese social media behemoth.

That’s not all. In a further concession, the latest version of the iPhone OS lets Chinese users ask Apple’s digital assistant Siri to pull up their WeChat QR codes (giving them a quicker means to connect with friends on the Tencent app).

X marks the spot

As the Wall Street Journal points out “Apple needs the new iPhone X to be a hit in China”.

However, unlike the reverential atmosphere that accompanied other Apple product launches in China, what was striking this time was the range of jokes made at the company’s expense. Aside from those earlier mentioned about the facial recognition feature, the high price of the iPhone X became a source of humour. Both the X and the two new iPhone 8 models will be 30% more expensive in China than in the US despite the fact that Americans are four times richer than Chinese on a per capita GDP basis.

“Selling two kidneys won’t be enough,” one netizen joked. “I will need to borrow a third from my girlfriend.” Another riposted: “When your two kidneys are gone, how could you have a girlfriend?”

One netizen even calculated that if you paid Rmb9,688 for the top of the range iPhone X it was the equivalent of: “a Xiaomi MIX2 unibody all-ceramic smartphone + Xiaomi water purifier + Xiaomi air purifier + Xiaomi TV 4A + iHealth thermometer + mobile power bank + Xiaomi smart family suit + Xiaomi AI audio + Xiaomi piston earphones.”

Most of the jokes were directed at the facial recognition technology (“What happens if I wear a face mask because of the Beijing smog? Will it still recognise me then?”) though some also picked up on the design. The iPhone X comes with a distinctive OLED screen that covers the entire front surface but also features a black bang at the top of the phone’s OLED screen, and some netizens pointed out that this made owners’ selfies look like they are sporting a distinctly unfashionable Tang Dynasty haircut.

Behind the jokes, there was also an element of glee in the local media about some of Apple’s recent missteps. Most notable, was the failure of Apple engineer Craig Federighi to get his phone’s facial recognition software to work at last week’s launch event. “Federighi was only able to stomach a few embarrassed laughs, while his phone continued to ignore him,” commented “He finally had to suffer the humiliation of manually unlocking it with his password.”

A number of Western analysts wonder if the number eight will make a difference to the handset’s sales since it is highly auspicious and signifies wealth generation. But Forbes is pessimistic: “Apple has launched its most revolutionary phone in a decade [the X], but even that isn’t enough to help the company regain its former glory in China.”

How to augment China sales?

Recent events suggest Apple is doing everything it can to woo Chinese consumers and stay in favour with Beijing. Where the government is concerned, Apple took two significant steps in August. It opened its first Chinese data centre in Guizhou and it removed virtual private network (VPN) apps from its store, which were helping local users to get round government censorship.

The iPhone 8 and X have also added a number of China-pleasing features. The location of local traffic cameras are identified on Apple Maps and users can even speak to Siri in Shanghainese.

But the biggest differentiator is the new augmented reality (AR) features, which are likely to play well with the millennial generation. In particular, the animated emojis, which Apple has branded Animojis, will allow users to create customised 3D versions of their own facial expressions.

This could make a big difference in a country where selfie-expression is so rampant and where Huawei is believed to have stolen a march with its P10 model (it has developed a filming technology – in association with Germany’s Leica – that can make users’ appear more attractive when they pose for selfies).

Apple’s Cook has previously said that AR is as important a breakthrough technology as the iPhone itself. “I think AR is that big. It’s huge,” the Apple boss is on the record saying. But he also recently mused AR will take some time “to get right”.

First steps in that direction include the new iPhone’s Sky Guide, which superimposes a map on top of the night sky to help identify constellations.

One of the key considerations for the new iPhone range will be whether existing users upgrade. A number of financial analysts believe there is a bulge of 2015 buyers who have been waiting for the iPhone 8. Will they stay with Apple or switch to Huawei, which analysts estimate has taken about 15% of its customers? Globally, Apple has a very high retention rate: above 80%. In China, it is a lower 60%, but still higher than Huawei’s 50%.

Tencent Technology believes Apple is taking the right path. After five quarters of disappointing sales, the company can now sell off its outstanding inventory at a cheaper price and boost its margins by selling the new range at a higher one. It may not demonstrably increase its market share in China, but it will increase its profits.

“It’s understandable that Apple takes this approach,” it says. “It’s returned to its long-standing strategy of skimming off the cream.”

Apple’s share price is up 37% year-to-date, giving it an $820 billion market capitalisation as of this week. This makes it the world’s most valuable company, with the $1 trillion mark now in sight (a 22% share price rally will do it).

Many analysts believe Apple will reach the landmark and a resumption of sales growth in China – fuelled by the new models – would certainly help.

As part of its coverage of last week’s launch the Wall Street Journal interviewed a 29 year-old hospital administrator in Beijing and a 30 year-old founder of a start-up.

Ms Wang told the newspaper she wasn’t dissuaded by the price: “I’m a big fan of iPhones. A lot of my friends will buy them too.”

However, Mr Xia, the entrepreneur, struck a more cautious tone: “Maybe I’ll buy it. Money isn’t an issue, but I want to know if my friends like it. I’ll let them try it first and then I’ll decide.”

Much is riding on which of these sample consumers – one enthusiastic, one more tentative – is more indicative of how Chinese demand will pan out for the new products.

The iPhone 8 went on sale today, but the X will not be in stores till November 3. A video posted this morning by Sohu showed an Apple Store in Beijing free of queues.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.