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Why Apple China is struggling

Apple’s sales decline is slowing – but there are several reasons why it is doing so badly in China…

While the iPhone 7 has not been out long enough to have had a full impact on this quarter’s numbers, it has helped Apple to moderate the pace of revenue decline.

Even so, global revenues are still down by 9 per cent over last year indicating that Apple is a long way off the steep growth trajectory it once enjoyed. With more investment going into stores, and with those store selling fewer products than they once did, it is not surprising that net income is on the slide. Indeed, Apple will be particularly disappointed with its rare full-year profit decline.

China is an interesting, and worrying, example of some of these points. Across this quarter Apple saw revenues fall by 30 per cent in Greater China. In part this is down to the fact the market is more mature and ownership of iPhones is higher than it once was. But it is not the whole story: domestic brands like Huawei and Vivo have gained share thanks to the fact that they have, in design and technical terms, caught up with Apple and are now seen more favorably by consumers. In essence, in China and elsewhere, while Apple’s products are still seen favorably, the distance between Apple and its competitors is nowhere near as great as it once was.

“No longer firing on all cylinders”

Globally, the change in Apple’s fortunes is partly down to the fact that it is no longer firing on all cylinders. Previously, Apple was able to rely on strong sales of phones, tablets and computers to drive up revenue and profit across all geographies. This is no longer the case. Tablet sales are in decline. Growth from computers, which are long overdue a refresh, is weak. And consumers in some markets are saturated with product which makes growth much more difficult to attain. The latter is exacerbated by the fact that new releases, such as the iPhone 7, have been iterative rather than innovative.

Unfortunately, Apple’s attempts to add new strings to its fiddle have not counteracted some of the strings that are now playing out of tune. In particular the Apple Watch, while a triumph of engineering, has simply not become a mass market product in the way that the iPhone, iPad, or iPod did. The one bright spot comes from service revenue, which includes streams of sales from Apple Pay, Apple Music and other services, and is up 24 per cent year-on-year. Over the longer term, this is a very lucrative part of Apple’s business and growth story, but it is not yet at the point where it is offsetting revenue declines in other areas.

Despite this relatively gloomy view, it is important to note that Apple is being judged by its own incredibly high standards. Even with the dips in growth it remains a phenomenally successful business that is far from running out of steam.

Complexity over simplicity

That said, there is a complexity creeping into the firm that runs counter to Apple’s underlying philosophy of simplicity. The recent launch of the iPhone 7 in the US is a case in point: the buying process has been dreadful. The cumbersome system of placing orders via the website, where users have had to enter carrier information, has frustrated many customers. Meanwhile the vast array of different models, color options and payment and upgrade methods has contributed to a shortage of the right stock in the right place and has inevitably slowed sales.

For a brand like Apple these things matter. As the company has always maintained, the experience of purchasing is almost as important as the product itself. While there is no doubt Apple continues to be committed to this mantra – especially with the store upgrades it is now rolling out – it needs to look more carefully at issues of stock availability and to make the purchase process simpler and easier.

Looking ahead, Apple’s prospects give cause for optimism. In the next fiscal year the company will come up against softer comparatives which will flatter performance. However, the unveiling, later this week, of new computers will help to ease up Mac sales. And as the iPhone 7 becomes more widely available, Apple will receive a nice growth spurt over the holiday quarter.

Longer term, the company will be helped by the natural replacement cycle of older iPhones as these break, are damaged, or become less attractive to their users. Furthermore, Apple will, at some point, come up with a new phone – or maybe another device – that represents a significant leap forward and puts it on a better growth footing.

As such, this current period is a hiatus rather than representing a material change in Apple’s long term prospects.

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