Apple's iPhone may be in for a struggle in China despite a record-breaking quarter

PUBLISHED : Wednesday, 22 July, 2015, 8:32pm
UPDATED : Thursday, 23 July, 2015, 9:33am

Technology giant Apple could see its iPhone sales under pressure in mainland China amid lingering uncertainty in the world's second-largest economy, according to analysts.

The prediction followed Apple's announcement this week of record iPhone unit shipments and sales in its fiscal third quarter ending June 27, powered by high demand in its "greater China" market – comprising the mainland, Hong Kong and Taiwan.

Apple reported a 35 per cent increase in iPhone shipments that quarter to 47.5 million units, up from 35.2 million in the same period last year. Sales growth for the iPhone in the same quarter was higher – up 59 per cent to US$31.4 billion, from US$19.7 billion a year earlier.

Analysts, however, remain convinced that mainland China's stock market crisis and weakness in overall smartphone demand signal a continued slowdown that could impact domestic iPhone sales in the near term.

Ken Hui, equity analyst at Jefferies, said in a report on Wednesday that those factors are "putting pressure on discretionary consumption", which could lead to iPhone demand in "becoming shaky".

"It appears that Apple has less room to beat expectations," Hui said.

"We have begun to see similar signs of weakness in sectors such as autos and property [in mainland China] ... we may see stronger pressure in the third quarter if our expectations come true."

Apple's greater China revenue last quarter showed a 21 per cent decrease to US$13.2 billion, down from US$16.8 billion in the previous quarter to March. But measured year on year, sales in greater China last quarter were up 112 per cent from US$6.2 billion.

Kirk Yang, Barclays' head of technology hardware research for Asia, said in a report on Wednesday that Apple already missed the market consensus estimates last quarter for the iPhone, "which Apple rarely does".

The consensus estimates for iPhone shipments in the quarter to June was between 49 million and 50 million units.

At a briefing with analysts on Tuesday in the US, Apple chief executive Tim Cook acknowledged that volatility in mainland China's equity markets "could create some speed bumps in the near term".

Still, he pointed out that iPhone unit growth in the greater China market remained high at 87 per cent last quarter.

"This is particularly impressive given [market research firm] IDC's estimate of only 5 per cent growth for the greater China smartphone market," he said.

Cook indicated that 4G mobile penetration in mainland China was only 12 per cent to date and that the country's middle class was still growing.

"We remain extremely bullish on China," he said. "We're continuing to invest. Nothing has happened to change our fundamental view that China will be Apple's largest market at some point in the future."

According to IDC, mainland China's smartphone market -- the largest worldwide -- has also reached a level of maturity where rapid growth for any brand will get harder to achieve.

"China is oftentimes thought of as an emerging market but the reality is that the vast majority of phones sold in China today are smartphones, similar to other mature markets like the US, UK, Australia, and Japan," Kitty Fok, the managing director at IDC China, said in May.

"Just like these markets, convincing existing users as well as feature phone users to upgrade to new smartphones will now be the key to further growth in the China market."

But Apple's shift to bigger-screen smartphones, with the iPhone 6 and iPhone 6 Plus, and the company's wider distribution capability around the world has had an immediate impact on its sales period. 

"There's no question that a large chunk of of Apple's installed base is still using older models, which leaves continued growth opportunity in the second half of 2015 and beyond," Ryan Reith, the program director with IDC's Worldwide Quarterly Mobile Tracker operation, said in a report.

Apple is expected to launch an updated smartphone model in September, which some have predicted will be called the "iPhone 6s".

Cook said Apple has kept its focus on first-time iPhone buyers, including those who make the switch from using Android smartphones. "We're still seeing very, very large numbers in the countries that you would want to see those in, like China, Russia and Brazil," he said.

Watch: Chinese smartphone makers have Apple in their sights