You might have heard in the news around August when that Apple became the first 1 trillion dollar public company. Well since then they have lost almost 40% of their stock price in just 3 months and are now the fourth biggest public company behind Microsoft, Amazon and Google’s parent company, Alphabet.
So, where did they go wrong? … Or maybe they didn’t go wrong at all…
Seven days ago CEO of Apple, Tim Cook, announced to investors that for the first time in 15 years, they had lowered their predicted revenue margin by roughly 9%. In one day their stock price fell 13.5%. What was the cause of this large dip in revenue prediction? According to Tim Cook it comes down to a couple of things. 1. Rising trade tensions between China and America, which caused China’s economy to slow therefore reducing sales and the amount of retail presence in Apple stores in China. 2 Cook stated that a large drop in sales in China were responsible for almost all of Apple’s revenue shortfall. He also stated that in already developed markets iPhone upgrades were less strong than they expected. This was for a multitude of reasons, most important of which were US dollar related price increases and customers taking advantage of reduced battery replacement pricing for older iPhones. But these are not the only reasons that Apple has been on a downward trend for about 3 months. Apple recently stopped releasing iPhone sales numbers, a trust they have held with their shareholders since they started selling the popular smartphone, and this was likely a cause of the large dip in Apple’s stock price this year.
However, one of the biggest problems that Apple had this year was the trade war with China started by the Trump administration. The $200 Billion USD tariffs that the US plans to impose on Chinese tech goods will have more of an affect on American companies that it will on Chinese ones.Apple isn’t the only company being damaged by this trade war. Other multinational companies such as General Motors, Caterpillar, Boeing, Qualcomm and Intel also reported profit loss due to trade tensions between the US and China and all 3 of the major US indexes posted their biggest annual declines since 2008.
Despite Trump’s belief that his tariffs on Chinese tech companies is going to benefit American companies, this trade war is one that America simply cannot win. This is because China and Chinese companies will very soon be able to survive without America, but American companies cannot survive without China. In the past 5-10 years, Chinese tech companies have grown exponentially for many reasons, but mainly because of the research and development money that the Chinese government pours into Chinese companies which is giving them an edge against their American competitors. The US government does not put the same amount of research and development funding into American companies such as Apple and Qualcomm. Which is one of the reasons why American tech companies have fallen behind in the last few years.
The Chinese government has put around US $300 Billion into the ‘Made in China 2025’ program, which has caused companies such as Huawei, Xiaomi, Tencent and many others to overtake their American rivals in terms of their technologies. When ZTE was banned from purchasing US semiconductors (microchips) in April of 2018, the whole company was put at risk because if you don’t have chips, your devices can’t run. One of the main goals of China’s Made in China 2025 program is making Chinese tech companies independent of American ones, which means companies like Oppo, Vivo, and Xiaomi will potentially start making either their own chips or buying from non-American companies. Had Huawei suffered the same fate as ZTE, the effect would have been minimal because their subsidiary HiSilicon make all of Huawei’s chips. Clearly the potential outcome of American tariffs pushing China to become more independent would be a disaster of epic proportions for American tech companies like Qualcomm who currently supply chips to most Chinese device makers.
The second main reason that Tim Cook stated in his letter to Apple’s investors was lower than anticipated revenue in China for sales across the board, including iPhone, Mac and iPad. This is for a couple of glaring reasons. The overseas pricing of iPhones is very problematic for two reasons. Firstly because of the strong American dollar, to the point where Chinese consumers are paying around $1860 USD for the iPhone XS Max, Apple’s flagship, which is priced at $1099 USD in the USA That’s around ¥11,500 YEN in China. But more importantly because Apple sets higher prices for its products overseas independent of the currency conversion rate. For example something that costs USD $1000 dollars in America may cost USD $1200 in another county independent of currency conversion rates. So why would Chinese consumers pay ¥11,500 YEN when they can get a flagship Huawei Mate 20 Pro for ¥4500 YEN or $650 USD.
Poor apple sales in china may also be explained by the consumer preferring a more futuristic phone, which seems to be the trend for the Top 10 most popular phones in China for 2018h- for example the Oppo Find X, an all screen phone which is offered to the Chinese market for just ¥5000 YEN or $760 USD. Chinese consumers weren’t the only market this year who weren’t buying as many iPhones and were sick of the $1000+ pricing model on Apple’s flagship phones. While Tim Cook noted that iPhone sales in already developed markets decreased this year for reasons of macroeconomic challenges, and American dollar related price increases, what he didn’t talk about is that people are sick of paying for $1000+ phones. In 2017, Apple released the iPhone X, their long-awaited revolutionary flagship device, and the first phone that they had released costing $1000 USD. This year Apple has released a very similar device, the iPhone XS, and is asking for the same over the top premium. The iPhone XS Max, Apple’s bigger flagship wears a $1100USD price tag as well. These devices simply don’t deserve this price tag as there are simply devices with better value for money at this price point like the Note 9. Samsung also released the Galaxy Note 9 for $1000 USD although it does wear that price tag much better than the XS and offers many more features than it’s Apple rival. Year over year, budget smartphones are significantly increasing in quality and therefore in sales. Companies like Xiaomi, Nokia, OnePlus, Oppo, and Huawei are leading that budget segment with phones becoming better and better value for money each year. Xiaomi released the Pocophone F1 this year a $350 USD phone with top of the range specs, and each year these companies cram more and more features into these budget phones. More consumers each year are opting for sub $600 USD phones because they don’t need to pay that price premium anymore for quality high spec devices, and this is reflected in Apple’s iPhone sales numbers for 2018. These sales figures got so bad, that they stopped releasing that information to their shareholders and the public. Apple cancelled 3 rounds of iPhone production this year because iPhones just weren’t selling anywhere near as well as they predicted. Last year, I predicted the iPhone XR to be a massive success for Apple, due to its very solid spec sheet fair pricing. Finally a semi-budget phone from the company. But the iPhone XR did not sell anywhere near as well as Apple expected. The people who buy iPhones, it seems, buy them for the top-notch specs. Apple is a luxury company and its consumers want the luxury top of the range products, so people who were willing to spend $1000+ on a smartphone opted for the more expensive, slightly more feature rich XS.
Trump’s trade war isn’t the only thing to blame for Apple’s low iPhone sales figures in China. All of the top 10 smartphones sold in China in 2018 (excluding the iPhone at #7) had a futuristic look and feel, and/or revolutionary performance, battery life, or advanced features that don’t often appeal to American markets. Within the top 10 Vivo V20/V20 Plus, Oppo Find X, Samsung Galaxy S9/S9+, Honour V9/V9 Play, Huawei P20 Pro, Meizu 7 Pro and Meizu 16 are the most innovative on the list. Features that some American consumers pass off as ‘gimmicks’ appeal greatly to the Chinese market. If Apple wants to better succeed in the Chinese market, they need to adapt and innovate, because while Western consumers may blindly stick to a brand, the Chinese market shows that their consumers opt for the latest and greatest in technological advancements. In 2007-2010, Apple didn’t have a lot of competition in the smartphone market. While Samsung, HTC and LG all had smartphones, they didn’t really catch on until around 2012 when Android started booming. Now Android makes up for around 70% of the smartphone OS market share. The Huawei P20 Pro gained a lot of press with its revolutionary 3 camera setup, which is one of the reasons why it still remains one of the most popular phones in China. The same happened to the Vivo NEX and Oppo Find X, they gained popularity for being the first ‘all screen phones’.
Apple fans say quite often that Apple might not be the first to do something, but they do it better than everybody else, and this is true less and less often because companies are simply making better and more affordable products than Apple.
Apple needs to realise that there is massive competition, and they need to up their game not just in the smartphone market but in computers, tablets and smart home devices. The mentality that ‘if we make something people will buy it’ is not a way to run a business anymore. I really want to see Apple succeed as a company, and I really hope this $300 billion dollar blow, makes them realise that they need to up their game if they are going to survive the next 5 years of tech.
Tech Input 