Apple wobbles in China as rivals offer more, for less

SAN FRANCISCO/HONG KONG - A sharp drop in Apple Inc's China revenue in April-June underscores the challenges it faces in its second-largest market as the technology gap with cheaper local rivals narrows and as Samsung Electronics keeps up a steady stream of new models across all price ranges.

While investors marked up Apple shares as the company sold more of its iPhones than expected, the stock rally may prove short-lived as demand for its products fades in China. Analysts predict Apple will lose market share in the world's leading smartphone sector.

"There's some cannibalisation of Apple's market share from competitive mid-tier models that cost a lot less and perform as well, from vendors such as Xiaomi and Vivo," said Huang Leping, an analyst at Nomura in Hong Kong, referring to rival Chinese models.

Salespeople at several electronics shops in Hong Kong said South Korea's Samsung was a bigger hit with consumers as it offers more products. Some display counters didn't carry any Apple devices.

"Samsung products have enjoyed greater sales than Apple as many mainland (Chinese) tourists tend to buy Samsung due to a greater variety of models with a wider price range," said a saleswoman at a Hong Kong computer centre. "That's why we stock more Samsung products."

Slipping down

In the first quarter of this year, Apple ranked top in Hong Kong with 46 per cent market share in smartphones, though that was down from 54 per cent in the last quarter of 2012, according to market research firm Canalys.

Even without releasing a new product, Apple sold 31.2 million iPhones in its fiscal third quarter, around a fifth more than analysts had predicted. But revenue from all Apple products in Greater China, which includes Hong Kong and Taiwan, slumped 43 per cent from the previous quarter and was down 14 per cent from a year earlier - worrying in a region where smartphone penetration is still low.

Greater China accounted for 13 per cent of Apple's sales, or US$5 billion (S$6.33 billion), in April-June - down from nearly 19 per cent in the previous quarter. Hong Kong was a particularly weak spot. "It's not totally clear exactly why that occurred," CEO Tim Cook said on a conference call with analysts.

"In the past three months, the number of mainland Chinese consumers of Apple products dropped about 50 per cent," said Sunny Tang, a salesperson at another Hong Kong electronics store that sells Apple products. "Android (Google's operating system in many Samsung phones) is much better than Apple, and in that period Samsung released at least five phones and tablets."

Nicole Peng Luping at Canalys said: "China is a very diverse market so you need to have very diverse products to serve different levels of customers - and that's the weakness for Apple."

Heating up

In the first quarter, Apple ranked 5th in China with 9.7 per cent market share, well behind leader Samsung with 17.7 per cent, and lagging, among others, Lenovo Group Ltd and Huawei Technologies, which said on Wednesday it was on track to hit 10 per cent revenue growth this year.

Nomura's Huang expects Apple's China market share to slip 1-2 percentage points in the coming quarters as the novelty of the iPhone 5 fades and as new buyers opt for cheaper smartphones.

The global battle for mobile supremacy is not just between Apple and Samsung. Huawei and ZTE Corp are growing across their Chinese home base, and South Korea's LG Electronics said on Wednesday it sold a record 12.1 million smartphones in April-June, more than double its year-ago sales.

As high-end smartphone sales hit a plateau, the US$2 trillion industry - telecom carriers, handset makers and content providers - is buckling up for a bumpier ride as growth shifts to emerging markets, primarily in Asia.

Even excluding China, Apple's revenue in Asia Pacific fell 35 per cent quarter-on-quarter.

CEO Cook, who has seen Apple stock fall by more than a fifth so far this year, blamed China's slowing economic growth, but said he remained bullish on that market. The "economy clearly doesn't help us, nor others," he told analysts.

He said, however, that the revenue numbers don't tell the whole story. Apple books revenue when it sells to resellers, who then sell the products to consumers. Sales to consumers - or sell-through - slipped just 4 per cent in Greater China from a year ago. By that same measure, mainland Chinese sell-through sales actually rose 5 per cent year-on-year, though that was a deceleration in growth, Cook said.

Web traffic

Beyond the Asia weakness, Apple's sales of its iPad - the device that catapulted tablet computing into the mainstream - underperformed. Apple shipped 14.6 million tablets in April-June, some way below rough estimates.

Some investors argue that Apple's hold on a market it created is likely to slip as rival smartphone makers as well as Google and Inc pile in, but Cook noted that usage data shows the iPad still commands a dominant share of Web traffic.

"iPad accounts for 84 per cent of the Web traffic from tablets," he said. "So if there are lots of other tablets selling, I don't know what they are being used for."

Given the pressures and increasing competition, Apple's stock rally should not be seen as proof that concerns over its outlook have abated, some analysts said. "It's nice to see a bit of a beat for a change," said Hudson Square Research analyst Daniel Ernst. But "earnings are still down year over year."

"It's going to take a new product introduction before we see earnings turn positive."