China's longer upgrade cycle is bad news for Apple (AAPL)

smartphone owners upgrade plans

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China’s smartphone upgrade market is waning, as the number of consumers who plan to purchase a new smartphone continues to decline, according to a new study by Penguin Intelligence, a Tencent-backed research organization in China.

The lengthening upgrade cycle will make China’s smartphone market a less reliable source of revenue for industry players, including device makers and app developers, that rely on users having the most up-to-date handset.

In particular, the report paints a dire picture for Apple’s efforts in China:

iPhone users are less willing to upgrade to a new device. Sixteen percent of iPhone users in 2017 plan to upgrade to a new handset each year, a decline of 43 percentage points year-over-year (YoY). Meanwhile, 24% of consumers using Android-powered smartphones plan to purchase a new handset each year, down 31 percentage points YoY.
iPhone users switching to Android phones prefer Huawei devices. Of the former iPhone owners who switched to Android, 42% opted for a Huawei device. The Chinese smartphone vendor, which recently overtook Apple as the second-largest smartphone vendor globally, is making headway in the high-end smartphone market.

This is troublesome for the company, which relies heavily on China as a source of revenue and growth. China is Apple’s largest market outside the US, accounting for over one-fifth of Apple’s total revenue in the 2016 fiscal year. The country also accounts for Apple’s largest source of iOS app revenue, according to App Annie.

But Apple is expanding its reach outside of China’s Tier 1 and Tier 2 cities, which could present a big growth opportunity. Thirty-nine percent of iPhone users in China live in Tier 3 and Tier 4 cities. In comparison, nearly 96% of iPhone users lived in Tier 1 and Tier 2 cities in 2010. Over time, the number of middle class consumers in rural areas will increase — by 2021, China’s middle class will grow to half a billion people. It would be in Apple's best interest to maintain its presence in these markets.

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