Apple’s (AAPL) dramatic decision to cut its Q1 2019 revenue guidance from $89 billion to $93 billion down to $84 billion on weaker-than-expected iPhone sales in China has rocked the company’s stock. Apple was down as much as 9.5% on Thursday.
In a letter to shareholders, Apple CEO Tim Cook said, “Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline.”
Simply put, Apple’s latest iPhones aren’t appealing to Chinese consumers. The high price of the $999 iPhone XS and $1,099 iPhone XS Max make it a tough buy for shoppers, especially when Chinese companies like Huawei and ZTE can sell equally impressive devices often for hundreds of dollars less.
The Greater China market has always been difficult for Apple to break into, and it’s only going to get more difficult.
China beat Apple at its own game
Apple’s exceptional design aesthetic is one of the main reasons the iPhone is such a popular device. But that same success also made the company a prime target for copycats looking to ape Apple’s style. For years, China’s biggest smartphone makers have been selling smartphones that look suspiciously like the iPhone. In 2014, Business Insider called out Huawei’s Honor 6 Plus for not only looking like Apple’s iPhone, but also using a similar name.
But Huawei, Oppo, and Xiaomi, which own 24.6%, 20.5% and 13.6% of the Chinese market, respectively, weren’t content with simply cribbing Apple’s design. As those companies pushed Apple’s market share to 7.5% in China, they also began to offer innovative features of their own.
For proof of this, look no further than Huawei’s powerhouse P20 Pro, which reviewers scored as well as Apple’s own iPhone X and Samsung’s Galaxy S9.
That handset has a three-lens Leica camera and an AI chipset, not to mention a stunning paint job and a long-lasting battery that easily matches up with the iPhone X. And yet it costs roughly $694, less than the iPhone X’s $999 launch price. Oppo’s own Oppo Find X is an equally strong contender for the iPhone, and tops out at $779.
None of these competing smartphones runs Apple’s iOS operating system. Instead, they operate a version of the Google’s (GOOG, GOOGL) Android. In the past, iOS would be a selling point on its own, but since Google’s Android has reached parity with iOS, there’s less reason to opt for Apple’s offering with the hopes of getting better features. What’s more, many manufacturers customize Android to their own liking in a way that appeals more to the Chinese market.
How Apple can overcome its losses
If Apple is going to manage a comeback in China, it will need to offer more low-cost handsets. According to CLSA analysts Cherry Ma and Nicolas Baratte, Apple’s best-selling iPhone in November was the $749 iPhone XR, which is less expensive than the iPhone XS and XS Max. The XS Max was the second best-selling iPhone, while the 8 Plus came in third. Year-over-year, Apple saw unit says fall 27.5% in the month of November, and 22.8% month-over-month, CLSA reported.
Huawei, on the other hand, saw a 33.8% year-over-year increase, and was flat month-over-month. The company’s mid-range Honor 8X was also its best-selling device in November, followed by the high-end Mate 20, P20 and Honor 8X Max.
At this point all smartphones are relatively equal across the board in terms of performance and features. Unless Apple can produce a truly innovative smartphone, the best bet for the company’s hardware division is to debut some kind of new, unique product beyond the smartphone. The Apple Watch and AirPods are certainly impressive, but they require you to own an iPhone to use them.
Apple needs a breakout device that reinvigorates the brand, and reminds consumers why it was once valued at $1 trillion. Until then, Apple’s trouble in China will continue.
More from Dan: