Apple alert raises fresh questions for tech giant

Apple's shock cut to its sales forecast is a dramatic move that has raised more questions than answers.

One is whether the problems in China cited by Apple are going to hurt other companies doing business there.

Another is whether Wall Street, which marked the shares down by 7.7% in after-hours trading, should have seen this coming.

The biggest, though, is whether the Californian tech giant is trying to use problems in China as an excuse for a wider downturn in its fortunes.

On the face of it, Apple's failure to hit the sales it had earlier predicted are entirely down to the situation in China, with Tim Cook, Apple's chief executive, noting that "most of our revenue shortfall to our guidance and over 100% of our year-on-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad".

Mr Cook further noted that sales during the quarter in a number of countries, including the US, Canada, Germany, Italy, Spain, the Netherlands and South Korea, hit record levels.

Yet this warning will merely emphasise to the company's critics that Apple has been overly dependent on the iPhone for years.

Image: Apple phones are more expensive than many rival handsets

Apple became the world's first company to enjoy a stock market valuation of more than $1tn in August last year but, since the shares peaked on October 3, they have lost almost a third of their value.

That decline, arguably, was exacerbated when, in November, the company said that it would stop reporting how many iPhones, iPads and Macs it has sold on a quarterly basis.

Arguing that the number of units sold in any 90-day period was not necessarily representative of how strong the business was on an underlying basis, Mr Cook told analysts: "If you go to the market and push your cart up to the cashier…it doesn't matter a lot how many units are in there, in terms of the overall value of what's in the cart."

That was a tacit recognition that, for some time now, Apple has been compensating for slower sales of iPhones, in particular, by raising prices.

Investors now fear that the new policy of non-disclosure will disguise the extent to which this has been going on and particularly in view of the fact that, as its products are some of the highest on the market, Apple does appear exposed should consumers start drawing in their horns.

There are also wider issues with the smartphone market that appear to be hurting Apple.

Consumers in developed economies are holding onto their existing phones for longer and putting off upgrading them because mobile phone operators are not subsidising the price of handsets to the extent that once they did.

Another factor is that, last year, Apple cut battery replacement charges following damaging revelations that it had been slowing down processor speeds in some older iPhone models.

Huawei has become one of the world's leading smartphone manufacturers
Image: China's Huawei has leapfrogged Apple in the smartphone market

That resulted in a number of customers opting to replace their battery rather than upgrade their iPhone to a newer version.

In China, specifically, other factors have wounded Apple – and not just the trade war with the US that Mr Cook cited in his letter to investors.

Chinese consumers have been opting in increasing numbers for smartphones made by local rivals, such as Huawei, which in July last year leapfrogged Apple to become the world's second-largest smartphone provider after Samsung.

Some of that may reflect Chinese consumers turning on Apple, as a prominent American brand, because of the trade war.

Crucially, though, this slowdown represents the continuation of a trend that began some time ago.

Apple's phones are not only more expensive than a lot of local rivals, in some cases, nearly three times as costly.

Huawei phones, in particular, are proving more popular because they are perceived as enjoying better connectivity.

Nor is it only Huawei which has been taking market share in China from Apple: the company has also been outflanked by Vivo, Oppo and Xiaomi, the latter of which, on a global scale, is now breathing down Apple's neck as the world's fourth-largest player.

And there is also evidence to suggest that Chinese smartphone consumers are less loyal to the brands of handset makers than those elsewhere.

American and European consumers, when replacing their iPhone, tend to opt for another iPhone.

In China, the vast popularity and near ubiquity of WeChat – a messaging, social media and payments app – means it is less traumatic to switch from one operating system like Apple's iOS to the likes of Google's Android, which is widely used in rival handsets such as those made by Samsung.

All of this means that from 2015, when it was the third largest player in the Chinese market with a share of 12.5%, Apple fell to fifth place, with a share of just 7.8%, during the first nine months of 2018.

This may have repercussions for other companies selling to Chinese customers.

There is a growing body of evidence to suggest that, as the quality of local Chinese brands improves, they are growing sales more rapidly than their more established US and European counterparts across a range of products and services, whether that is food and drink, smartphones or even films.

But Apple does appear to have some very specific local market difficulties in China.

As to whether Wall Street should have seen this coming – well, with the shares having fallen by a third since the start of October, arguably it did.

Much of what was in Mr Cook's letter to investors – the impact of the strong US dollar, the impact of constraints in its supply chain and tough year-on-year comparisons with the final three months of 2017, when the iPhone X was launched – was already factored in.

What did come as new news was the extent to which sales had slowed down in China.

The bigger point is not whether Wall Street should have seen this coming, but whether Apple itself should have.

It is all very well selling smartphones at $1,000 to comparatively wealthy consumers in the US and Europe, but consumers in emerging markets like China do not, for the most part, have that kind of money.

There was always going to be a day when iPhone sales stalled.

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Apple has talked in the past about diversifying to reduce its dependence on hardware, but at present, only about one sixth of its sales come from services.

Mr Cook may now seek to accelerate that pace of change – perhaps by using the company's remarkable $130bn cash pile to snap up services businesses.

Original Article