The bull or bear debate about Apple hinges in large measure on one question: Is a 21 percent slide in sales in China over the last year a temporary hiccup or a sign of permanent change in the world's largest market for smartphones?
Apple's booming stock price is tied largely to expectations that the next versions of the iPhone will unleash a surge of sales, particularly in China. The biggest share of Apple’s revenue growth in the last four years -- about one-third of the $51 billion gain -- came from the region that Apple calls Greater China, which consists of China, Hong Kong and Taiwan. The new iPhone is expected to reverse what has been five consecutive quarters of falling sales in the region. Bernstein Research estimates iPhone unit sales in China may jump by 35 to 40 percent in Apple's fiscal year ending September 2018.
That's the optimistic case. There is debate whether the sliding China sales are a blip or an indication that the growth Apple experienced in China after the blockbuster 2014 iPhone edition was the aberration.
The troubling thing is it's hard to rely on Apple itself for a confident reading of the company's promise in China. Apple repeatedly hasn’t come to grips, at least publicly, with its challenges in China. Only with an honest accounting can investors have confidence in the potential for Apple’s China recovery.
When sales in China first starting falling more than a year ago, Apple executives said at first that the situation wasn't as bad as the numbers suggested. Starting in April 2016, executives said that Apple's China region revenue was hurt by a reduction in inventory by smartphone sellers, by the relative weakness of the currencies in Hong Kong and China compared with the U.S. dollar, tough comparisons to blockbuster 2015 iPhone sales and slower economic growth in China. (This was not long after Apple had said it wasn't feeling the effects of slowing Chinese economic growth.)
More recently, Apple has said sales declines in the China region wouldn't get worse. That has proved to be true so far. I suppose congratulations are in order for acknowledging a falloff in revenue more than six months after it started. In May, CEO Tim Cook said Chinese consumers were particularly prone to holding off on buying new iPhones until Apple releases the remodeled edition later this year.
There is an endless grab bag of excuses, and some of them are valid. Apple also deserves major kudos for being one of the few U.S. tech companies to build a huge and successful business in China, and it's clear the company is in China for the long haul. But Apple could also benefit from far more candor about its present and future in China.
I cringed when Cook told Bloomberg Television's Emily Chang in a recent interview that his company's latest iPhones were the first and third most popular smartphones in China. That may be true given that his competitors sell scores of different models and Apple has only two current generation phones. But he's also not choosing the most accurate way to discuss Apple's standing in China.
Apple is in fact the fourth most popular smartphone company in China. Local companies Huawei, Oppo and Vivo all sell more smartphones in China than Apple does, according to research firm IDC. In the first three months of this year, Apple sold 9.2 percent of total smartphone units in China, IDC figures show. Two years earlier, Apple was the top-selling smartphone company with a 14.7 percent share of devices sold.
Are the market share losses temporary? Cook doesn't really go there. He has said a couple of times that sales of older generation iPhones are disappointing in China. That seems like a potential weakness worth some elaboration, but Cook doesn't go there, either. Nor has Cook discussed much how competition and the maturation of China's internet economy are creating fresh risks for Apple.
China in 2017 is a far different tech market from what it was a few years ago when Apple’s efforts there came to stunning financial fruition. Now, Chinese companies are making smartphones that are competitive head to head with some of the iPhone's best features and functions. The popularity of Tencent's WeChat app in China makes iPhones less essential for many people. They can swap an Apple device for a rival smartphone without losing hold of where they spend the majority of their digital time.
If the next iPhones sell like crazy in China, I will be wrong and Apple's lack of candor will be moot. But if China sales don't deliver as expected, Apple will have a lot of explaining to do.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
The market share rankings in China have been volatile over time. And Apple doesn't typically care about market share. But in this case it seems Apple does care about market share.
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