How Apple Found Victory in China’s Mobile Marketplace

WANG ZHAO/AFP/Getty Images

Source: Wang Zhao/AFP/Getty Images

Thanks to smart strategy and favorable market trends, Apple landed on top in China in its record-setting first quarter, with sales of the iPhone 6 and iPhone 6 Plus propelling Apple beyond Xiaomi, Samsung, and Huawei to the top spot among smartphone manufacturers in the Chinese market.

The New York Times notes that while Apple is famous for setting trends, its recent success in China is in part attributed to its following one. After years of weak sales in China, a country where large-screened phones from rivals sold exceptionally well, Apple introduced its own bigger iPhone 6 and iPhone 6 Plus, opening the way for a flood of interest from Chinese consumers.

When Apple reported the record results of its first quarter, the company said that it saw $16.1 billion in revenue from “greater China,” a region that includes mainland China, Hong Kong, and Taiwan. Apple’s revenue in the region is up 70% from the same period a year ago. Apple CEO Tim Cook said on the company’s earnings call that interest in the iPhone 6 and iPhone 6 Plus among Chinese consumers was “phenomenal” in the quarter. The new iPhones attracted the largest number of customers switching from an Android device ever.

“It’s an incredible market,” Cook said. “People love Apple products. And we are going to do our best to serve the market.”  It wasn’t long ago that both Apple and Samsung seemed at risk of losing the Chinese market to regional smartphone makers. But Apple’s earnings show that the foreign tech giant is back on top in China.

Apple sold more phones in China than anyone else

The research firm Canalys reports that Apple is now the top smartphone maker in China. With record sales of the iPhone 6 and iPhone 6 Plus, Apple rose to first place (by units shipped) in the Chinese smartphone market. As Canalys notes, “This is an amazing result, given that the average selling price of Apple’s handsets is nearly double those of its nearest competitors.”

Quartz points out that the price gap between Apple and its Asian rivals could be even larger in reality. Apple’s average selling price, or ASP, rose by $50 to $681, in the fourth quarter. As recently as June, Huawei’s ASP was $155.30 and Xiaomi’s was $159.60. Despite the much higher price tag of the iPhone, Canalys says that the top four smartphone makers in the quarter were Apple, Xiaomi, Samsung, and Huawei. Apple’s surge in popularity demonstrates that there are large numbers of Chinese consumers who want what Apple is selling and are willing to pay the premium price for Apple’s iPhones.

Apple’s rise is displacing long-time rivals like Samsung

It wasn’t long ago that sales of Apple products in China were slipping. Last October, Apple was the number six smartphone maker in China, and trailed Asian rivals Huawei, Lenovo, Samsung, Xiaomi, and Yulong in the region. But as the smartphone market has grown saturated in markets like the United States and parts of Europe, Apple’s growth has slowed. The company has responded by moving to compete more aggressively with its competitors in China, and in Apple’s most recent quarter, Chinese consumers, who have long been known to prefer larger phones, chose the iPhone 6 or iPhone 6 Plus over competing products from companies like Samsung and Xiaomi.

Samsung seems to be falling from power in China, where it was once the best-selling smartphone brand. Bloomberg notes that the iPhone 6 and to a larger extent the iPhone 6 Plus took a key advantage that Samsung had over Apple in China’s market: Big screens. The last time that IDC released data on the Chinese market, Apple was the eighth-largest player in the country. Crawford del Prete, IDC’s chief research officer, tells Bloomberg that he expects Apple to be in the top three when new data is released in February.

While much of Apple’s growth in China comes from new smartphone users, del Prete says that Samsung has more to lose than any other company. Though the fight between Samsung and Apple has shaped the smartphone industry for years, it’s in many ways taking a back seat to the competition between Apple and Xiaomi, a regional smartphone maker that mirrors Apple in many ways. Apple certainly hasn’t locked down the Chinese market, where Xiaomi, Huawei, and others offer significant competition. Xiaomi, for example, recently launched the Mi Note, which competes with the iPhone 6 Plus but costs less than half the price. Apple’s popularity could fall as quickly as its risen if, like Samsung, it isn’t able to generate demand for the next-generation iPhones it will launch in the fall.

Apple is in the midst of building a retail empire in China

Apple’s new traction in China is due to the inroads it’s been working to build into the world’s largest smartphone market. In 2013, Apple made a deal with China Mobile to offer iPhones to the 800 million subscribers of the largest wireless network in the world. Canalys attributes Apple’s current success in China to the deal with China Mobile, and to the carrier’s rollout of high-speed LTE mobile data. Also in 2013, Apple introduced the iPhone 5c, a lower-cost version of the smartphone that analysts expected would help increase sales in China. Recent data suggests, though, that consumers in China want bigger iPhones, not cheaper ones.

Apple plans to open 25 new stores in the region over the next two years, adding to the 15 stores it currently operates there. Five new stores will be opened ahead of the Chinese New Year prime shopping season. Behind the company’s retail plans is Angela Ahrendts, Apple’s new retail chief, who said in a rare interview with state-run Xinhua Daily that her biggest challenge in China is “keeping up with demand while providing the same global customer service standards.”

Ahrendts also noted the importance of China’s opportunities for both brick-and-mortar and online stores. Xinhua Daily reports that online orders in China were up 80% in 2014, and Ahrendts says, “The fastest growing store for us is the Apple Online Store in China.” On the earnings call with investors, Cook said that for the quarter, revenue from the Chinese Apple Online Store outperformed the sum of the previous five years.

Luca Maestri, Apple’s chief financial officer, declined to disclose to The New York Times how many iPhones were sold specifically in China. Some reports had suggested that sales in China would surpass those in the United States. Maestri told Reuters in an interview that Apple did not sell more iPhones in China than in the United States, despite those earlier predictions. Maestri also said that he does not expect Apple to struggle because of China’s slipping economic growth, noting, “We haven’t seen a slowdown.”

Apple’s earnings report showed that most of Apple’s revenue in the quarter came from the Americas, where Apple reported $30.6 billion in sales. Apple Insider notes that while it still landed in third place worldwide, China’s $16.1 billion in revenue put it just behind Europe, which generated $17.2 billion in revenue. But in comparison to China’s 70% year-over-year growth, Apple’s revenue in Europe grew only 20%. Similarly, the company’s domestic revenue was up 24%. Tim Cook mentioned recently that he considers it simply a matter of time until the majority of Apple’s sales come from China. Cook has emphasized for years that an expansion into China is an important next step for the company.

However, Apple will continue to face significant challenges in China, where Quartz says it can only operate with the acquiescence of the Chinese Communist Party. In the past, state-run media outlets have criticized Apple for allegedly anti-consumer business practices. Regulators have raised concerns that the company could be gathering data on its Chinese users — or even sharing information with American intelligence agencies. Apple has taken steps to placate regulators by agreeing to “security checks” that would allow Chinese officials to access its networks and hardware.

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