Apple's (AAPL) China Position: Stronger Than You Think

For all the people that turned negative on Apple (NASDAQ:AAPL) because of flagging iPhone sales in China, let me tell you -- Apple’s China market position isn’t as bad as it looks.

Yes, revenues in Greater China were down 26% this past quarter, somewhat impacted by currency. But the iPhone maker remains one of the top smartphone sellers in the country. In a market that grew just 2.5% in 2015, Apple managed to pick up 4.6 points of share. Market leader Xiaomi gained just 2.6 points and number two Huawei 4.8 points. The fourth and fifth largest vendors Oppo and Vivo gained 2 points and 1.5 points, respectively. This, in a market where Apple’s iPhone is priced more than 3X higher than the next priciest phone (from Oppo).

What Gives Apple This Clout?

Apple has done some smart marketing, positioning the iPhone as a premium luxury product that serves as a status symbol. This allows Apple to charge a hefty price, helping make the iPhone a luxury status item. Apple has successfully played on this in other markets too.

And the strategy appears to be paying off. According to a Chinese survey report released earlier this year, Apple was voted by far the top brand for gifting by ultra-rich Chinese men, ahead of LV, Gucci and Cartier. Women preferred Channel and LV with Apple coming in a close third. The position is slightly changed from 2015 when both men and women had Apple as their top brand and possibly because some new categories were added to the survey this year.

So while we are ruing Apple’s declining sales, we should remember that Apple continues to grow mind share, which is most important for long-term success.

Understanding the Chinese Smartphone Market

With the Chinese government supporting and promoting local entrepreneurship and the smartphone capturing popular imagination, the last few years have seen scores of smartphone makers entering the market. iPhone clones provided inspiration for sub-clones (if we can call them that!) until the market was literally flooded with low-cost alternatives.

Consequently, Chinese smartphone penetration increased rapidly and many people who couldn’t imagine owning such a device now do. But they are naturally loath to replace it simply because of some additional feature(s).

So the low-cost smartphone makers are seeing decelerating growth, some are seeing huge declines and some are going out of business. The ones that survive have deeper pockets, have successfully maintained mind share and have made greater progress in international expansion.

In this scenario, the only reason for people to upgrade their phone is if their phones don’t work anymore, if they love a brand or if they perceive they are getting something extra, like a little status for example. In a market with high penetration and status consciousness, it’s good to be a premium brand. Because when they change their handsets or brands, there’s a really good chance they will want that something extra.

Finally

Some encouraging numbers are also available:

Apple suppliers have been asked to produce 72-78 million iPhone 7s this year, above the Street’s expectations of 65 million devices. This is reportedly the highest production target in two years.

BMO analyst Tim Long reiterated his Outperform rating and price target. He says that Apple’s installed base is currently larger than ever with 25% owning devices more than two years old. This will spur upgrades.

According to UBS analyst Mulinovich, however, the limited innovation in iPhone 7 will lead to sluggish upgrades, especially from iPhone 6 although he too agrees that people using older devices with 4-inch screens will upgrade.

Not Convinced?

That’s fine because Apple shares currently have a Zacks Rank #5 (Strong Sell), so we aren’t recommending them. Safer bets in technology would undoubtedly be Facebook (NASDAQ:FB) , Silicon Labs (NASDAQ:SLAB) or Paylocity (NASDAQ:PCTY) since all these have a Zacks Rank #1 (Strong Buy).