Apple’s dilemma in China: Why is it fleeing the more it embraces it?

Apple's annual revenue fell for the first time in 15 years. The more it embraced, the more it fled. The Greater China region declined by 30%.      

On the afternoon of the 25th, local time, Apple released its financial report for the fourth quarter of 2016 (July to September 2016), which showed that the company had revenue of $46.9 billion, net profit of $9 billion, and EPS of $1.67, which met the expectations of Wall Street analysts, but its stock price still fell sharply by more than 2% after the market closed. The sales of its main products declined, but the revenue of its "service" project was $6.325 billion, an increase of 24%, and its revenue performance has been better than that of its hardware Mac and iPad for three consecutive quarters.

Apple's revenue in fiscal 2016 was $217 billion, down 9% from $233.7 billion last year, the first time Apple has experienced an annual revenue decline since 2001.

By region, we can see:

Apple's revenue in the Americas in the fourth quarter was $20.229 billion, down 7% from $21.773 billion in the same period last year.

European division revenue was $10.842 billion, up 3% from $10.577 billion in the same period last year;

Revenue in Greater China was $8.785 billion, down 30% from $12.518 billion in the same period last year.

Japan segment revenue was $4.324 billion, up 10% from $3.929 billion in the same period last year;

Revenue in the rest of Asia Pacific was $2.672 billion, down 1% from $2.704 billion in the same period last year.

Among them, the revenue decline in Greater China was the most serious, reaching 30%, which is shocking.

Cook has always had a unique view on the Chinese market. As early as 2013, he believed that the iPhone had a promising future in China and predicted that Greater China would see record growth. With the release of iPhone 6, Apple's sales soared, with a year-on-year growth rate of 84%, and its performance in China also reached its peak. However, as it faces more and more challenges, especially the strong rise of Chinese mobile phone manufacturers, Apple feels more and more pressure.

In order to adapt to and please the Chinese audience, Apple has further "Sinicized" the settings of its latest models: for example, the memory configuration has been changed from 16G to 32G, and the price has been reduced. Previously, China was Apple's largest overseas market, but the first launch location for new products was never in China. However, this year, the first launch location for iPhone7 was changed to China. From Apple's investment in Didi to the announcement of the establishment of a research and development center in Shenzhen, Cook and Apple can be said to be constantly showing goodwill to China.

However, the market changes quickly. When the iPhone 6s was released last year, Apple’s miraculous growth in China disappeared, and it also ushered in a disappointing performance report. In recent quarters, Apple’s revenue data in China is roughly as follows:

Apple's revenue in China in the first quarter of fiscal year 2015 was US$18.37 billion, a year-on-year increase of 13.8%.

Apple's revenue in China in the second quarter of fiscal year 2015 was US$12.48 billion, down 25.8% year-on-year.

Apple's revenue in China in the third quarter of fiscal year 2015 was US$13.23 billion, down 33.1% year-on-year.

In other words, Apple's revenue in China has been declining sharply for three consecutive quarters. Apple is in trouble in China.

Dilemma 1: The rise of Chinese hardware manufacturers, from mobile phones to platform businesses, all-round head-on competition

1. Terrifying and powerful Chinese mobile phone manufacturers

UBS analyst Steve Milunovich said, "The initial sales of iPhone 7 were weaker than those of 6s." This performance will be the culprit for Apple's poor performance. The analyst believes that Apple is losing market share in the Chinese market.

In August, a market research company released a sales report of the top 20 Chinese smartphone brands in the first half of 2016. The data showed that the overall sales volume of domestic smartphones in the first half of 2016 was 250 million, of which Huawei’s sales volume reached 43.77 million, firmly taking the top spot in the domestic market. OPPO and Apple ranked second and third with sales volumes of 29.02 million and 27.66 million respectively. In addition, vivo and Xiaomi’s sales volumes were 25.55 million and 23.65 million respectively, ranking fourth and fifth.

Recently, the latest report released by TrendForce, a global market research organization, shows that global smartphone shipments in Q3 maintained strong growth momentum, with production of about 350 million units, a record high this year, of which 168 million were produced by Chinese manufacturers. From a global perspective, the top three companies with the highest shipments this quarter are Samsung, Apple, and Huawei, while the top three companies with the highest shipments in China are Huawei, OPPO, and VIVO.

Apple's market share fell mainly due to fierce competition in China's smartphone market. Xiaohan Tay, an analyst at IDC Asia Pacific, said, "Vigorous marketing and 'focus on product differentiation' have greatly laid the foundation for the success of Chinese domestic mobile phone manufacturers." For example, Huawei touts its mobile phone's camera lens, OPPO emphasizes its battery flash charging technology; while Apple's iPhone SE launched in early 2016 failed to break through the siege because Chinese consumers prefer large-screen phones.

Industry insiders pointed out that, in fact, it is not feasible for the iPhone to compete with domestic mobile phones by lowering prices, because if Apple lowers its prices, domestic mobile phones can also lower their prices.

2. Competition between Android and iOS is heating up

In the middle of this year, Appannie released a report revealing that the revenue of games on the Chinese App Store in the first half of the year was about 1.8 billion US dollars, while the revenue on the Android platform was about 4.5 billion US dollars, with a ratio of 2 to 5. As the Android market share continues to expand, the gap may widen further in the future. As China has become the world's largest mobile game market, the user value behind it cannot be ignored. Judging from the actions of the manufacturers behind the two systems, the platform confrontation is surging.

China has a range of local smartphone manufacturers, and the products launched by these manufacturers are also very competitive, although some people point out that the Android experience is still far behind iOS and does not have the refined feeling of iOS software at all.

However, with the optimization and upgrade of Android hardware and systems, the gap with Apple in user experience is getting smaller and smaller.

According to the iiMedia Research "2015-2016 China Smartphone Market Research Report", by the end of 2015, Android ranked first with a 73.1% share of system coverage in the Chinese smartphone market, while iOS accounted for 19.7%. Domestic Android phones have emerged and seized a group of potential Apple users.

3. Channel and supply chain control

As domestic mobile phones continue to move towards high-end, the supporting Chinese supply chain capabilities are also collectively improving. Some technologies were already developed by Chinese supply chain manufacturers before Apple launched new products. In the past year, as domestic mobile phones have turned to the mid-to-high-end market, many excellent upstream supply chain companies have begun to strengthen cooperation with Chinese manufacturers. Huawei Consumer Business CEO Yu Chengdong also said at the 2016 first half performance sharing meeting that he is not worried about Apple's new products at all, and Huawei has already used many technologies.

In addition, it is understood that when Apple first entered China, through Apple's brand effect, strong retail capabilities, and the ability to gather consumers in core cities and core business districts, Apple's own retail channels were able to achieve good results, but they could not fully cover all types of consumer groups. Therefore, when iPod first entered China, Apple chose the regional agency system for channel construction. However, as Apple products became popular, Apple's channel control in China began to become difficult, so Apple later changed the regional agency system to a national general agency system, and the original regional general agency channel structure was upgraded to three major distributors responsible for the national layout.

However, after opening up the Chinese market through general agent distribution, Apple began to set up direct retail stores and high-quality dealers in China. As early as last year, Cook said that the number of Apple stores in Greater China would increase from 15 to 40. However, as a result, the days of Apple agents have gone from bad to worse, and the profits of products provided to authorized dealers in IT stores are not as good as before.

Dilemma 2: China's complex national conditions make App Store game revenue increasingly uncertain

The financial report pointed out that App Store revenue increased by 43%. App Annie recently released a report that in the third quarter of this year, China surpassed the United States for the first time and became the world's largest sales market for Apple's application software, with sales revenue reaching a record $1.7 billion. Chinese iOS users seem to be more willing to spend money on software rather than hardware, which is actually a good thing for the healthy development of a company, but the development of the App Store in China has also encountered very complex "national conditions".

App Annie: Top 3 Countries by Quarterly iOS App Store Revenue

The report shows that currently, in the Apple App Store in China, the sales proportion of "non-game" software for social networks, books, photos and videos is increasing, and sales revenue has more than tripled in the past year. However, game products are still the main source of income. According to the application type, most of China's revenue growth comes from games, and its iOS game revenue lead over the United States also widened further in the third quarter. 75% of the revenue of the iOS App Store still comes from games.

Cook also said in Apple's third quarter conference call for fiscal 2016 that the company expects service revenue to reach the scale of a Fortune 100 company by fiscal 2017.

However, China's complex "national conditions" also bring uncertainties to the App Store's game revenue.

First, there is the long-standing practice of chart manipulation: Apple has a clear attitude towards chart manipulation. In order to combat the practice of wall manipulation, Apple has made adjustments to the App Store algorithm many times in addition to regular supervision, such as reducing the download weight of the App Store free list, increasing the weight of factors such as uninstall rate and user retention, and removing apps suspected of chart manipulation. However, chart manipulation has almost become an unspoken rule in China, and "inside pictures" of large companies' chart manipulation have been continuously leaked. It is rumored that the latest market situation is: 400,000 recharges to make it into the top 5 of the best-selling list.

Secondly, the version number that will be implemented recently: the Chinese App Store issued a notice at the end of June this year that mobile games need to be approved by the State Administration of Press, Publication, Radio, Film and Television before they can be released. This is like a bombshell among Chinese game developers. For Apple, this is actually a double-edged sword: on the one hand, Apple responds to the Chinese government and strengthens cooperation, which is also conducive to the purity of the gaming environment; but on the other hand, the most direct result of the strict implementation of the version number is that the number of games online may be greatly reduced in the future, which may not necessarily be a good thing for Apple's revenue.

At present, Apple is in a complicated and embarrassing period of "turning a blind eye" to the issue of new game license approval: ASO100 analyzed the App Store game market data before and after the new regulations were officially implemented (May 1 to September 29) and found that the number of mobile games launched in the past three months far exceeded the number of approvals (73,676 launched: 848 approved), indicating that many games still bypassed the review process. If strictly enforced, what kind of situation and changes will it bring? This is also a question that Apple needs to think deeply about.

As for the new revenue growth point of the App Store, Search Ads will be officially launched in the US on October 5th. It is not yet open to the Chinese market, but given the importance Apple attaches to the Chinese market, it is believed that it will happen sooner or later. The results of such reforms will have to wait and see.

Dilemma 3: Lack of innovation and need to understand China's national conditions. Apple's halo is fading

Apple has suffered a setback in the Chinese market for several consecutive quarters, which also reflects the rise of Chinese local mobile phone manufacturers. Neil Shah, director of device and ecosystem research at Counterpoint, told CNBC that if Apple cannot speed up its hardware innovation and launch new features every year or even every six months like its Chinese rivals, Apple will fall behind. The reason why Chinese mobile phone brands can continue to advance in the mid-to-high-end market is that they bring a large number of innovations to the market at a faster rate.

However, the R&D center set up by Apple in China is not large-scale in terms of investment scale or number of employees. Some people point out that the purpose of the R&D center is not to increase iPhone sales in China, but to develop new smart hardware or software services, and to increase domestic iPhone users' content consumption in the APP Store.

Apple will establish a research and development center in Shenzhen, which is positioned as a procurement center for South China and Southeast Asia. It will mainly arrange five major sectors: supply chain management, operations, research and development, and online and offline retail. The core point is still to start from Apple's own ecology. To put it bluntly, it is still to make money for Apple. Some people pointed out that Apple's behavior in the Chinese market is more of a commercial behavior, treating the Chinese market as a "machine" to make money, rather than cultivating talents for China.

When Apple first entered China, for some buyers, the iPhone was not only a cool electronic product, but also a symbol of success. Not everyone cared about the functions of this product. But this "identity label" began to disappear as Apple became more popular. In contrast, the marketing tactics of domestic mobile phones have been continuously upgraded, and the configuration and technology of products have been continuously improved, and many consumers have begun to shift.

However, we should also note that: in fact, the App Store in China has been promoting localization in China. From the beginning, there were no Chinese games in the recommendations, but later Chinese games were constantly recommended, and some Chinese games, such as "Carp", were even recommended globally. The tastes of Apple's editors in China are becoming more and more Chinese, and they have even begun to visit some Chinese game manufacturers. In addition, the rules of the App Store in China are also constantly adjusted, which is also to adapt to China's ever-changing and complex "national conditions".

Why do we flee the more we embrace it? In the final analysis, technology is the driving force behind everything. Just as Apple changed the entire mobile phone market, the same is true for the Chinese market. We will have to wait and see how Apple's situation in China will develop.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.