Apple may have lost half its market share in China (AAPL)

Apple may have lost up to half its market share in Greater China.
Analysts are calling the company's performance there "weak."
Most Chinese may be too poor to buy an iPhone.
Although the company now has a large installed base in China, a "supercycle" of upgrades keeps not happening.
Competition from domestic Android makers like Huawei and Oppo has been much stronger than expected.

Apple's revenues in Greater China increased 11% to $18 billion last quarter, and CEO Tim Cook told analysts "everywhere I look, I feel really good about how we're doing in China."

But researchers with sources in China aren't so bullish. They believe the iPhone X may be hemmed in by its excessive price (which places it far out of reach of the vast majority of consumers in China) and by the aggressiveness of local manufacturers such as Huawei. They forecast Apple's sales — which cycle wildly from quarter to quarter — declining in the near future. And they believe Apple's market share may have been cut by a third or more in the last three years.

Apple

Morgan Stanley analyst Katy Huberty sees "continued weakness in China" for the upcoming quarter, which Apple will report on May 1. Analysts at UBS and Nomura also used the word "weak" to describe Apple's recent performance in China.

The problem is that in 2015, when the iPhone 6S was launched, Apple had a stellar year in China and Hong Kong. It sold 71 million phones in the region, according to data from UBS and Gartner. That peak has been hard to beat. In Apple's fiscal 2017, that number was down to 49 million. UBS analysts Steven Milunovich and Benjamin Wilson estimate sales will decline to 47 million in fiscal 2018.

Apple's iPhone unit sales in Greater China
2015: 71 million
2016: 59 million
2017: 49 million
2018: 47 million
Source: UBS estimates/Gartner

"We think it's doubtful China returns to its 2015 peak as local brands have caught up and upgrade cycles are lengthening; we expect a flattish market, give or take a few points of growth depending on the overall market and product cycle," the UBS team told clients recently. "At the peak in 2015, we believe Apple likely had 40-50% share with Tier 1 and 2 consumers; we think that figure is closer to 20-30% today."

UBS

Morgan Stanley believes Apple's share may be down to 18%.

Jeffrey Kvaal of Nomura has a similar view. "Non-Chinese smartphone shipments in China, which are mostly iPhones, fell YoY in the month of March," he told clients recently. "C1Q shipments fell 9% YoY or 41% sequentially, below the 3-year seasonality of down 32%." Total smartphone shipments and iPhone shipments are closely correlated, Kvaal's data show.

The problem is that although China is a vast market, most people in it remain relatively poor by Western standards. There are 1.3 billion in China, but only about 200-300 million of them live in the "Tier 1" and "Tier 2" cities (like Shanghai or Beijing) that are rich enough to afford iPhones. Outside those major metro centers, Apple has few distributors and promoters. "Local brands make extensive use of promoters to influence consumer decisions. Oppo, Vivo, and Huawei have over 100,000 promoters each versus Apple with only 4,000," Milunovich says.

UBS

At the same time, Huawei and other high-end Android makers have upped their game. They now have a 56% share of the market, to Apple's 37%. Back in 2015, it was Apple with the dominant share, at 54%, according to data from UBS and Gartner.

Since the success of 2015, analysts have been eagerly awaiting a "supercycle" of upgrades from users who want to swap their old phones for a new one. But the supercycle keeps not happening, partly because owners are keeping their iPhones for longer and partly because Apple keeps launching new phones whose features are only marginal improvements over the older models.

"Patience is wearing thin among investors on this elusive upgrade cycle with China playing a major role in the success or failure Apple will see over the coming year around this key product upgrade cycle," GBH Insights analyst Daniel Ives said in a research note recently.

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