► Apple's sales in the Greater China region are hardly seeing any growth, even with aggressive promotion activities.
► Huawei and other Chinese companies have been squeezing Apple's market share over the past five years through price competition and technology innovations.
► iPhone's economic moat has been jumped over by Huawei, both in software and hardware.
► Huawei ecosystem-boosting strategy helps lift its users stickiness, a pattern resembling Apple's initial marketing approach.
► With its relatively low profit margins, Huawei is scaling up across quite a few segments of the Chinese market.
► In the near future, Chinese consumers may not be shelling out for Apple's brand and technology premium, as there are better options around.
This is the first part of our analysis of Apple's (AAPL:NASDAQ) integration into the Chinese market. Here, we discuss its smartphone business from the perspective of market demand. Please follow EqualOcean updates for better understanding of the American company's industrial value chain in China.
Apple, the US technology titan, handed in on July 30 a handsome quarter release to the investors, stimulating wall street analysts to turn bulls for its stock and driving its market cap to near USD 2 trillion in the following trading days.
Before Apple officially released its fiscal third-quarter (three months end in June 27) earnings, several press releases from market research institutions had already pointed out Apple’s full category sales uptrends in China and around the world. In the Chinese smartphone market, the iPhone realized the largest growth rate for years at 35% year-on-year in the second quarter of 2020. This was mainly driven by the solid adoption of the latest and lower-priced SE model and discount policies.
However, the Greater China segment is not as promising as the boosting shipments volume – here we find a bland growth figure. Among the company's three largest business regions, net sales are strongest in the Americas and Europe, which were up 8% and 19%, respectively, while in the Greater China region, sales were up by 2% only. Speaking of a sales spike is not quite helpful.
The Greater China segment, which once was the crown jewel of Apple's business, generating a quarter of its total revenue, does not seem to favor the US brand much ever since its net sales in China peaked in 2015. The market share road map in China tells a story of Chinese local brands, especially Huawei, relentlessly squeezing Apple's sales. From 2014 to the second quarter of 2020, Huawei grew from 11% of the total market to an absolute dominance at 45%. By contrast, from Apple’s peak in 2015, the downslopes were consecutive, from 15% to the most recent 8.3%.
So, what led to the opposite trends of Apple and Huawei’s smartphone businesses in China? To figure this out, let’s trace it back to the beginning of the 2010s.
iPhone – the initial trend leader
During the emerging years of smartphones – from 2010 to 2013, the same period that iPhone got its primary popularity – most consumers were not familiar with how things worked in a mobile phone, and consequently problems such as where to download official apps and how to prevent ads from popping up were universal. iPhone's impeccably designed iOS solved this pain point through its user-friendly UI and the embedded Apple store, which served as the only way to install applications.
Besides the operating system, the firm's most solid moat was customer switching costs, as it bolstered the user experience with a cohort of auxiliary products such as iPad, Apple TV, Apple Watch, AirPods, and so on, and services (iCloud, iMessage, Apple store and Apple Pay) that augmented Apple’s sphere of influence around the consumer. After all, it is cumbersome to switch hundreds of gigabytes of photos on iCloud to Baidu Cloud when iPhone users decide to leave the brand.
The pricing strategy of Apple for the iPhone –which saw it double or even triple the market average – was an advantage when the iPhone was the trend leader in China, before 2016. At that time, any innovation of Chinese phone brands seemed like counterfeits of the iPhone. Thus, an iPhone with high price and trendy functions signaled social status and good personal taste.
Huawei and other Chinese brands – the power of latecomers
The chart above shows that, since 2015, Huawei and other Chinese brands are on the track of replacing the iPhone in the Chinese market. Especially Huawei, which has bit by bit moved around the iPhone’s economic moat.
As the most solid moat of Apple is the switching cost brought by its well-developed product and service ecosystem, which could basically satisfy all recreation and working needs, Huawei has made progress in building the loop that increases customer retention.
On the software side, the company’s efforts in the company's exclusive user interface EMUI (Emotion UI for Huawei phones and Magic UI for Honor) and Huawei Mobile Services (HMS) have yielded some of the most attractive features of Huawei phones. Exclusive features such as ‘Huawei Share’ for data transmission between Huawei devices, ‘Private Space’ for hiding all secret files /photos /apps, and ‘twin apps functions’ for logging in different social media accounts, are luring users to switch to Huawei phones. Besides, the company has been working hard with the HMS, which is a replication of Google (GOOG:NASDAQ) services including Google Play, Gmail, Chrome browser and so on (those developed by Google were banned from operating in Huawei mobile devices after Trump’s blacklist for China in May 2019. As the Huawei software of AppGallery and hardware of PC, the tablets and accessories ecosystem is becoming mature, and consequently increasing the customer switching cost. Huawei stands in a position of maintaining its n.1 position for the next three years.
Latecomers win through hard pushing
With a product gross margin at 29.7%, Apple's profitability is way higher than other top smartphone vendors, including Huawei, which levels at around 7-8%. The reason is that Apple is the only phone vendor that only targets the premium segment and prices the product higher than any of its competitors.
However, Huawei's flagship P series and Mate series do attract some of the iPhone customers to switch, while the low-end specs phones that the company also covered are expected to bring more service income which has a margin approximately twice larger than the hardware.
During the year of 2019, Huawei pushed 24 new models into the market, with series like Nova, Changxiang, Maimang, Mate and P, almost exhaustively covering consumer groups with a price range from USD 100 to 1,000. Besides the full consumer coverage, Huawei invested heavily in inviting celebrities to endorse its flagships. Over the past two years, 10 international stars have served as Huawei representatives, including the world's highest-paid actress Scarlett Johansson and the six-time European Golden Shoes winner Lionel Messi. Apple, on the other side, has been resorting to the strategy of 'product talks' or 'CEO talks,' which significantly decreased its sales expenses and formed an 'Apple is Apple' brand image.
Brand + innovations = USD 400?
The comparison chart above shows a USD 400 gap in average selling prices of Apple and Huawei, while we can also see the DXO marks and Antutu marks, which serve as benchmarks for cellphone performance, of Apple and Huawei's flagships are in a close race.
Apple's smartphone price premium is obvious. However, as the iPhone is losing the leadership in the Chinese market in terms of technology innovation and brand impact, the pricing turns from an advantage to a major shortcoming. The innovative features arise in the Huawei ecosystem before Apple, such as OLED screens and 3D sense. Consumer sentiment for technology gadgets can be unforgiving, with one buggy or subpar product potentially driving customers to other companies' offerings.
After all, Apple cannot charge twice the price of a similar hardware package solely by sticking an Apple logo on their own offering.