Will Apple’s quarterly earnings be shaken to the core as iPhone’s popularity declines in China?

Apple is expected to deliver more bad news to investors when it reports quarterly earnings on Tuesday, as recent research data suggests iPhone sales declined in the December quarter in China, with analysts unsure of a swift recovery in the near term.

Following Apple’s rare warning to investors in early January lowering its first-quarter revenue guidance, Strategy Analytics, a Boston-based research agency, confirmed that iPhone shipments had dropped by 22 per cent in China during the fourth quarter last year – the firm’s worst performance since early 2017.

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Although overall Chinese smartphone shipments tumbled 11 per cent annually to reach 108 million units in the fourth quarter of 2018, Apple’s performance in China is in sharp contrast to the 23 per cent rise in Huawei Technologies' shipments and 8 per cent increase in Vivo. Oppo and Xiaomi, the other two vendors in the top five brands, reported a 2 per cent and 35 per cent decline in handset shipments for the same period.

Shares of Cupertino, California-based Apple cratered 10 per cent on January 3, a day after the company slashed revenue guidance in a rare acknowledgement of waning sales. While Apple chief executive Tim Cook blamed a weak Chinese economy for a downgrade in revenue guidance for the quarter ending December, analysts also believe he may be glossing over strategy missteps and the effects of fierce competition from fast-improving Chinese smartphone brands.

Although the fourth-quarter shipment remains poor on a year-on-year basis, Apple has already seen some improvements in iPhone sales over the previous third quarter., according to Zaker Li, a Shenzhen-based senior research analyst at IHS Markit.

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Li did not elaborate as the agency is yet to publish its report.

“We’ve seen iPhones were on top of the sales chart across many online sales platforms during the Singles’ Day sales in November in China, and the company had also promoted heavily and tried to stimulate sales by offering more incentives to the consumers,” said Li. He acknowledged, however, that Apple has lagged behind leading local brands in the world’s largest smartphone market.

On Friday, Strategy Analytics became the first research firm to release smartphone shipment figures for China for the past quarter. Others, including IHS Markit, will release their numbers in the coming weeks.

Apple’s iPhone inventory build-up may lead to lower guidance for the current quarter and subsequent downward revisions to analyst estimates, Sanford C Bernstein & Co analyst Toni Sacconaghi wrote in a note to clients, according to a Bloomberg report on Saturday.

Sacconaghi’s note suggests an inventory of up to five million units and a big drawdown in the second quarter could pressure estimates.

While Apple’s high-end flagship iPhone XS failed to take off in China because of its US$1,000 plus price tag, its mid-range iPhone XR models also failed to excite consumers.

Less than a month after the iPhone XR hit the shelves in the country, Apple informed two of its suppliers in China that it would reduce orders for their respective components by around 30 per cent from what was originally planned because sales had fallen short of the US company’s expectations, the Post had reported earlier.

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“This isn’t a one-off thing. I think this is a potentially year-long problem, if not longer,” Ben Bajarin, an analyst at Creative Strategies, was quoted in a Financial Times report on Saturday.

“We don’t know where the bottom is yet [for iPhone sales],” said Bajarin.