On Apple's Slowing Growth - China and More

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Last week, comments from Apple CEO’s “Letter from Tim Cook to Apple investors” included:

  • While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be.

  • "While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements."

  • China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States ...

  • "And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.”

OUR TAKE

  • Given that Apple management (during its quarterly earning call in November) said it would alter the way Apple reports revenue growth (in a less transparent fashion), a change in business momentum is not surprising.

  • While an economic slowdown in China likely contributed to Apple’s slower growth, other factors include 1) saturation of the smartphone market in US and Europe and 2) increasing smartphone upgrade cycles (from 18 months to 36 months).

  • As Apple continues to leverage its brand, Chinese competitors (Huawei, Oppo, Vivo, Xiaomi) are offering similar smartphone offerings at lower prices, sometimes 50% less.

  • Bottom line: Apple is an amazing business success story. Now, it faces the challenge that other industry leaders of the past have confronted – maintaining and attracting talent as its growth slows.

Paul Dravis