Why China is Apple’s biggest hope and greatest headache

When Tim Cook dropped by Starbucks on a visit to China last year, he pulled out his phone to use Apple Pay. No dice — the Apple boss's account lacked a connection to the country's dominant payment system, so an assistant was obliged to step in and buy him coffee.

Apple often has such problems in China, where it struggles to attract users away from cheaper products that feature widely used local apps such as Tencent’s WeChat.

"China is a big problem and not easily addressable," says Geoff Blaber, analyst at CCS Insight. "Apple's differentiation has always been content and services driving the premium [hardware]. That differential is very hard to justify in China."

Revenues in Greater China fell 10 per cent in its quarterly results announced this month, its sixth straight quarter of year-on-year sales decline. China — just two years ago Apple’s most promising market and poised to eclipse the US as its largest — is now its biggest headache.

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Apple has argued its main difficulty is in the tourist hotspot of Hong Kong. However, in mainland China it points to sales improving in the most recent quarter, up 6 per cent after adjusting for currency fluctuations.

"We feel very good about the performance in China," Luca Maestri, Apple finance chief, told the Financial Times earlier this month. "We think [China sales] will continue to improve in the September quarter."

But analysts say the bulk of Apple’s Hong Kong sales are to mainland tourists, and its sales slowdown signals flagging demand in the world’s largest smartphone market.

They add that the iPhone’s features are no longer enough to justify the $150 or so price differential with comparable local phones. Domestic players also use more aggressive distribution strategies.

"Over the last six to eight quarters we've really been seeing Apple, in terms of volume, start to recede in China," says Ben Stanton, an analyst at Canalys.

The company’s problems are partly the result of strong local alternatives. The dominance of WeChat, which gives users the ability to install in-app “mini apps”, creates a miniature alternative to Apple’s proprietary iOS operating system.

WeChat chose the iPhone’s 10th anniversary earlier this year to launch mini apps and became the only major alternative app provider to Apple’s App Store on the iPhone.

WeChat’s structure allows most daily tasks to be done within the app, making it easier for Chinese consumers to access the services they want regardless of whether they use iPhones or Android-powered smartphones.

That means users assign less value to the iOS ecosystem of apps, content and devices that are compatible only with the iPhone.

A key example of this was apparent last week when Apple's phones were excluded from Beijing public transport while rival Android-powered phones could be waved over a terminal as payment. This is because Apple reserves contactless payment for its Apple Pay app and does not integrate it with other popular systems such as Tencent's WeChat Pay and Alibaba's Alipay.

As a result, Apple Pay has been a dud in China, with less than 1 per cent of China’s $8.8tn (2016 estimate) mobile payments market. Mr Cook’s problems with using Apple Pay in the Starbucks was because his phone was not connected to UnionPay, China’s dominant credit and debit card service.

For most groups, the glitch would be understandable and minor, but for Apple, which prides itself on a seamless “it just works” experience, the episode pointed to the small ways its ecosystem is out of sync with the rest of the Chinese market.

Hence Apple's falling fortunes. As at the second quarter it had an 8 per cent share of China's smartphone market, according to Canalys, down from 12 per cent in the final quarter of 2014, and behind domestic manufacturers Huawei, Oppo, Vivo and Xiaomi. It does, however, pull in a far bigger share of revenues — roughly one in every five dollars spent on devices — a reflection that Apple phones are much pricier. Huawei and Apple, says CK Lu, research director at Gartner, a consultancy, are now "pretty close" globally in terms of shipments. The big clue as to whether Apple can maintain its lead will come, he says, with the launch of the new iPhone, which will test the sustainability of demand for Apple's expensive phones.

Copyright Financial Times