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The next iPhone will mark a major test for Apple in China

Today (Sep. 12), the world will watch as Apple unveils its latest flagship device. Fanboys will swoon as the company touts several industry firsts, along with the new iOS 11 operating system. Rival brands will be on the lookout for features to copy as they prepare new handsets of their own. But how will consumers in China react?

Once a source of sky-high revenue growth for Apple, China has been cold on the iPhone throughout 2017 and much of 2016. Now, the country’s reception of the next iPhone will mark a major test for the company. Is the iPhone still desirable as status symbol? Or, has the device lost its luster, as consumers increasingly value the software on their phones more than the physical phones themselves?

A rise and a plateau

Between 2015 and 2016, the iPhone enjoyed success in China. Despite the country’s reputation as a difficult country for foreign companies to navigate, Chinese consumers flocked to the device for the same reasons consumers elsewhere did. The phone’s hefty price tag, proprietary software, and famous ease-of-use ensured that while Android would dominate the low-end of China’s smartphone market, Apple could confidently nab a large slice of the high-end.

Meanwhile, the iPhone remained sought-after status symbol—a sign that one was a member of the country’s affluent class. In 2015, the phone was ranked the top ‘most-gifted’ luxury item in China, beating out Hermes and LVMH. Tim Cook himself confirmed that the gold iPhone, perceived by many in the West as tacky, was a response to demand from Chinese consumers. News stories of people proposing to loved ones with piles of iPhones and selling kidneys just to afford the device went viral among China’s tabloid media outlets.

That rise has hit a wall, however. Quarterly sales from Greater China (which includes Hong Kong and Taiwan) have sunk steadily since the three-month period ending in December 2015. The company brought in sales of $8 billion from the region last quarter, the lowest since September 2014.

There are a number of factors behind this drop. In Autumn 2014, Apple introduced the jumbo iPhone 6 Plus, which addressed Asia’s preference for large-screened phones. About one year before that, it inked a distribution deal with China Mobile, the country’s largest carrier, making the device cheaper upfront for 760 million consumers. With those “shortcuts” to growth exhausted, there are now fewer obvious expansion opportunities for Apple in China.

Meanwhile, this slump arrived as the broader demand for smartphones slowed in China. And as phones become better in quality, there’s less of a reason for consumers to upgrade from their existing device to a newer one. Simply put, the glory days for the iPhone in China have come to an end—everyone who wants one likely already has one, and those who have one probably won’t need new one for sometime.

What’s next?

For Chinese consumers in the market for a phone, there are two reasons to purchase the next iPhone.

The first reason is the device’s underlying technology, which looks set to leap far beyond previous iPhone iterations. Some of the models expected features are old for other brands but new for Apple, like wireless charging, a nearly edge-to-edge OLED screen, and no home button. Others will mark industry firsts, like a AR-centric sensors and cameras. Unlike the iPhones 7, which were incremental improvements on the 6 series tech-wise, the next flagship iPhone will likely have just enough new bells and whistles to coerce existing iPhone owners to upgrade.

The second reason is out of appreciation for Apple’s brand, or its software’s ease-of-use. Yet it’s not quite clear if China’s consumers value these factors as much as they used to.

On the one hand, Apple’s brand remains relatively strong in China. Xiaohan Tay, an analyst who tracks the country’s smartphone market at research firm IDC, says that the iPhone is still seen as a social marker, “especially in certain industries like banking and consulting, where employees are often pressured into owning an iPhone to maintain a certain status when meeting with clients.

On the other hand, a survey released in January by Chinese media outlet Toutiao suggests (link in Chinese) that Chinese iPhone owners may not be as loyal to Apple as they once were. Whereas in 2015, 66.85% of existing Chinese iPhone owners stuck with the brand when they bought new phones that year, in 2016, that figure slipped to 50.30%. That’s still well above the loyalty Chinese consumers have shown other brands. But it nevertheless marks a percentage decline, and is much lower than the brand’s retention rate globally.

Blogger Ben Thompson, who flagged the chart back in May, has speculated that WeChat might be responsible for a dip in loyalty among iPhone users in China. A do-everything app that lets users chat with friends, pay for goods and services, read the news, and perform countless other tasks, it has become an integral part of every day life in China. And it’s possible that Chinese iPhone owners might downgrade from Apple to a cheaper Android brand that works just-well-enough to run WeChat.

“Apple may be a de facto monopolist for most of the world, but in China the company is simply another smartphone vendor, and being simply another smartphone vendor is a hazardous place to be,” Thompson wrote.

If Apple’s next iPhone is a hit in China, it can rest comfortably. Yet if it bombs, it will have to brace for impact.

The company’s services like Apple Pay and Apple Music, which have shown promise overseas, are unlikely to make much of an impact in China. There, too many competitors for payments and media already exist (WeChat chief among them). As for other hardware—the Apple Watch appears to have tanked globally, the new HomePod will face tough rivals in China, and its car ambitions appear years away from turning into a reality. If Chinese consumers don’t welcome the new iPhone, there’s not much else Apple can offer them.

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