Reliance on sales in China puts Apple to test

China has been one of Apple’s most reliable strongholds during its historic stretch of technology dominance. Even when sales began to level out in the US, Europe, and Japan, China was a buffer, promising a massive market of newly middleclass customers looking for a high-end, brand-name smartphone.

Sales in Greater China, which also includes Taiwan and Hong Kong, grew 84% to $58.7bn (€54.2bn) in 2015, making it the company’s second-biggest market after the US.

Apple chief executive Tim Cook showered the region with praise at the time for its importance to the company’s future.

Apple’s reliance on the country is now being put to the test.

On a conference call with analysts after its Tuesday earnings report, Mr Cook said the company is beginning to see “economic softness” in the region, particularly in Hong Kong.

China is no longer able to offset sluggishness elsewhere or counter the broader slowdown in the global smartphone market.

“You need to take into account the business opportunities that we have but also the realities of an economic environment that is not ideal right now”, said Luca Maestri, Apple’s chief financial officer, noting sales in Brazil, Canada, Japan, and Russia also are being affected by global economic malaise.

Reliance on sales in China puts Apple to test

Mr Cook remains optimistic about China and vowed that Apple will invest through any downturn.

And given the company’s resources (there’s still a whopping $216bn on its balance sheet), he has the luxury of playing the long game.

It has 28 stores in mainland China now and will have 40 by this summer.

Demographic trends are working in the company’s favour.

Roughly 80% of people in the country are still using older phones that run on 3G networks. Those customers will be up for grabs when they finally decide to upgrade.

In 2010, Cook said less than 50 million people in China were considered middle class, but by 2020, that number is expected to jump to 500 million.

Apple is poised to benefit in the longer term if China shifts toward a more consumer-led economy, away from its emphasis on manufacturing.

“I don’t subscribe to the doom and gloom predictions,” he said.

Even so, the results make clear Apple is no longer a hyper-growth company that’s riding the twin coattails of a booming smartphone market and buoyant Chinese economy.

For the first time since Steve Jobs introduced the iPhone in 2007, the company is projecting that quarterly phone sales will fall.

Meanwhile, other products such as the iPad and Apple Watch show no signs of filling the void.

In an interview after its earnings report, Maestri said Apple’s expanding services business will be a source of future growth.

The company generated $31bn (€28.5bn) in such revenue from the App Store, Apple Music, iCloud, Apple Pay, and other services last year, he said, making Apple one of the biggest internet services companies in the world.

However, investors remain sceptical, sending the stock down about 20% in the past six months. 


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