Scaling the Great Wall

Apple's China challenge is real but misunderstood

Apple's China challenge has been lost in translation. Slowing sales, a currency devaluation, and market-share losses in the People's Republic have helped cut $92 billion off its capitalisation since July 20. But the biggest problem may be local rival Huawei also going after high-end customers.

None of this is good news. But a little perspective is needed. A weaker yuan will cut Apple's China revenue in dollars. But it could raise prices to compensate, given the iPhone's premium customers are likely to be less price-sensitive.

Second, local rivals Xiaomi and Huawei have overtaken Apple in sales rankings from Canalys. But market shares change frequently depending on new models. The $660 iPhone 6 is already 10 months old: a long time in China, where customers are seldom stuck in long contracts. The next version will surely revitalise sales.

Third, margins matter more than volumes. When Apple launched the iPhone 6 in the fourth quarter of 2014, it took 89 per cent of global smartphone operating profits, Strategy Analytics estimates.

All that said, the Middle Kingdom represents more than a quarter of Apple's total revenue, and a much bigger chunk of future expected growth. So the negative momentum is a problem. And there is another genuine danger ahead.

Consumers looking to spend over $600 on a smartphone currently favour the iPhone or Samsung's Galaxy models. But that could be changing: although privately held Huawei doesn't have a credible iPhone rival yet, its mid- to high-end phone shipments jumped 70 per cent year-on-year in the first half. Other peers from ZTE to Lenovo are circling too.

Creating a serious iPhone alternative would be no small feat. Sales of Huawei's priciest phones are tiny set against the iPhone's, suggesting customers have yet to be convinced. But a killer handset could put real pressure on Apple sales and margins in the country. To make things worse, it's harder for Apple to lock in Chinese smartphone users into its software and content. Rival platforms in China based around Android, Google's mobile operating system, carry more apps and content. The Huawei threat cannot be ignored.