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A question of volume shot from elevated Chinese phones hangs over Apple

SAN FRANCISCO (Reuters) – A wonderful profit warning from Apple Inc. ( AAPL.O ) vendors this week have pushed investor…

SAN FRANCISCO (Reuters) – A wonderful profit warning from Apple Inc. ( AAPL.O ) vendors this week have pushed investor concerns that the volume of iPhone sales has hit a wall that could spell inconveniences for the company’s plans for to serve services as its main pillar of growth.

PHOTO: A customer compares the size of the new iPhone XS and iPhone XS Max at the Apple Store in Singapore on September 21

, 2018. REUTERS / Edgar Su / File Photo

Over the past year, investors had been willing to overlook stagnant unit sales of iPhone because average selling prices continued to rise. But it is now facing fierce competition from medium-sized phones from manufacturers such as Xiaomi Corp ( 1810.HK ).

Apple has often said its plan to increase its revenue from paid services, such as Apple Music and iCloud. At least in part, it requires a growing base of device owners powered by their iPhone, which analysts believe account for about two thirds of the 1.3 billion Apple devices used worldwide.

Wall Street analysts have expressed concern that slower overall smartphone sales will make it harder for Apple to keep smartphone market shares as people quenched buying their more expensive phones. This could in turn hurt the growth of Apple’s service revenue, says Bernstein’s Toni Sacconaghi.

Without volume growth in promising overseas markets such as India, Brazil and Russia, analysts and investors are worried that at least Apple shares at least part of its strategy wrong with excessive emphasis on its premium brand and the high prices that go with it, more than $ 1,000 (£ 774.71 pounds) for its top models.

Hal Eddins, Chief Financial Officer of Apple Shareholder Capital Investment Counsel, said phones like OnePlus 6T are roughly comparable to Apple’s advanced phones for almost half of the price. “You can get a lot of phone for much less,” he said. “The phone landscape is changing quickly and I think manufacturers are missing a trick by going on the $ 1,000 route.”

Apple refused to comment on its strategy, or the stock moves among its suppliers.

Company executives have previously held investors against fixing on sparse data points from the major supply chain. Apple has for more than a decade insisted that its gadgets should not be judged on their specs alone, an argument that sales data suggests that Apple succeeded.

The company also has customer satisfaction and loyalty levels that are unmatched in the mobile phone industry, “says Ben Bajarin, an analyst with Creative Strategies.

However, a trio of Chinese smartphone manufacturers – Xiaomi, Oppo and Vivo – accounted for about a quarter of the global market in the first half of 2018, according to data from the research company IDC, from just 8.9 percent for all 2014 and almost 20 percent last year.

With the exception of budget 2015, Apple has not increased its market share. It had 13.6 percent of world markets in the first half, down from 14.8 percent for 2014, although its share usually rises with full-year earnings due to strong sales in December.

The 1.3 billion iPhones, iPads and Macs used worldwide serve as a pool of potential customers for Apple services – a company that buys $ 37.1 billion in revenue for the last fiscal year.

It represented 14 percent of Apple’s total revenue, up from 8.5 percent in fiscal 2015 when iPhone device sales hit its full-time high.

But IDC expects the global smartphone market to grow only 2.4 percent to 1.6 billion units in 2022, indicating a saturated market where the Cupertino, California-based company will fight all customers.

Xiaomi, in particular, gets fans fast. In India, where Apple only has a smaller presence, Xiaomi has in some cases hit Samsung Electronics Co. Ltd ( 005930.KS ) to become the country’s premier telecom dealer and also makes progress on European markets such as Spain, IDC said in a report.

According to data from IDC, Xiaomi was the best smartphone seller in India in the first and second quarter of 2018, with 30.3 percent and 29.7 percent of the smartphone device market there.

“This is the case where it is very different in other parts of the world,” said Ryan Reith, vice president of IDC mobile devices, and notes that most US consumers are not familiar with the Xiaomi, Oppo and Vivo phones.

“Many of these brands do not play (in the United States), but they play in places where they never played before,” like India and Europe, he said.

SUPPLIERS SUFFER

Apple has shocked investors in its latest earnings with a lower expected sales forecast for the holiday quarter and announced that it would stop reporting device sales for its hardware products as it has been customary in the past 20 years.

Underscoring flattening iPhone device sales, it also said it sold 217.7 million iPhones in its last fiscal year, almost unchanged from the previous year and well below a high point of 231.2 million in fiscal 2015.

Its share price, hit at the time of the forecast, has subsequently extended losses after profit warnings from suppliers such as Japan Display Inc ( 6740.T ), British chip maker IQE Plc ( IQE.L ) and Lumentum Holdings Inc. LITE.O ). The stock is now down 8 percent since its November 1 results.

Apple’s latest models like the iPhone XS and iPhone XR appear popular with their most loyal fans in rich economies. But they vary up to $ 1 449 in price – out of reach for many consumers in less developed markets.

Apple’s strategy is to attract these consumers to their older-model ecosystem at cheaper prices.

It has also emphasized that its phones are designed to last longer than the competition, expanded their repair options, and designed their latest operating system update to speed up older devices.

But Chinese smartphone manufacturers have packed their phones with advanced chips and features like fingerprint sensors under glass aimed at attracting consumers who could otherwise give Apple’s phones a look.

These manufacturers assume increasingly Qualcomm Incs ( QCOM.O ) most powerful mobile phone chips, “said Cristiano Amon, chief of chip operation at the American chipmaker, locked in a bitter court dispute with Apple.

These phones were originally sold in China but “We have also seen them get outside China, especially in areas like India and Europe,” said Amon.

On its own lawn, Apple faces new challenges from at least one Chinese manufacturer, OnePlus, which creeps into the American high-priced retail area. Although the iPhone 7 processor clippers OnePlus 6T in a few speed tests published by Geekbench chip tracking company, the OnePlus phone features a modern design with thin touches around the display similar to newer iPhone models.

After one year of being available only in the United States through an online store and developing a number of tech enthusiasts, OnePlus 6T is the cage of T-Mobile US Inc ( TMUS.O ) stores.

At $ 549, it’s between iPhone 7 and iPhone 8 in terms of pricing. Kyle Kiang, head of North America for OnePlus, said today’s sales of the new model were 86 percent higher in the United States than for the previous OnePlus released there, even though he did not disclose absolute device data. He said sales were higher due to the T-Mobile ratio.

Reporting by Stephen Nellis in San Francisco; Edwina Gibbs Editing, Nick Zieminski and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.

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