Apple Inc. (NASDAQ:AAPL) has saturated the premium smartphone segment in China with a market share of 85% in the last quarter. This limits the growth runway for Apple stock. As the smartphone industry has matured in China, any future growth in the premium segment should closely correlate with the overall growth of the economy. At the same time, there has been rapid consolidation in this industry due to winnowing out of weaker players.
The remaining players have increased their efforts to grab a greater share of the mid-price segment. This is negatively affecting sales of older iPhone models and also putting a downward pressure on the total unit sales in this region. Similar trends in other emerging markets will limit AAPL growth in these regions.
Consolidation in the Industry
In the latest IDC report on China, the biggest trend that can be noted is the growth in market share by the top five smartphone companies. The Kantar report, which was quoted by Tim Cook during earnings also states that in Urban China, the market share of the top 5 smartphone companies is at 91% compared to 79% in the year-ago period.
In the last quarter, the total unit shipment in China has dropped by a staggering 15%. The top five players have increased their market share from less than 70% in Q4 2016 to 82% in Q4 2017.
Source: IDC
A similar trend can be seen in the preliminary data for the calendar year 2017. The smartphone sales have reached their peak and are now showing minor decline year-over-year.
In the full year, the shipment volumes of non-top 5 smartphone companies have declined by close to a third. Apple had the worst results among top 5 players, showing 8.3% decline in shipment volumes in 2017 compared to 2016.
Growth in Revenue and Fall in Unit Sales
In the last quarterly earnings, Apple showed 11% sales jump from $16.2 billion to $17.9 billion in Greater China region. This helped Apple stock maintain its current price level. A growth in sales and a fall in shipment volumes can be blamed on poor demand for older-generation iPhones in the mid-market segment.
For example, Apple’s 32 GB iPhone 6s is listed at 3,788 RMB on Apple’s online store in China which translates to $596. Similarly, an entry-level iPhone 7 sells for 4,588 RMB or $723. On the other hand, one of the flagship products by Oppo, R11, sells for only 2999 RMB or $440. R11 has a display similar to iPhone 7s Plus and has double the RAM and storage than entry-level iPhone.
Saturation of market and concentration of market share in top 5 companies will force these players to engage in more aggressive pricing in the mid-market segment. This will have a negative impact on Apple’s unit sales for cheaper, older versions of iPhones. AAPL stock is heavily dependent on the performance of Apple in China and this trend will increase the bearish sentiment towards Apple stock.
Unit sales are important for Apple if it wants to build a strong ecosystem. It is also important for adding more services to its platform. During the earnings report, Apple’s management mentioned about using Apple Pay for a subway in Guangzhou, China. If Apple is limited to the premium segment in China, the growth of Apple Pay and other services will be seriously hampered.
Ripple Effect on Other Emerging Markets
The trend in China is being followed in other emerging markets of Southeast Asia and India. The Indian smartphone market grew by 14% in 2017 due to an expansion of the market as 4G telecom services become cheaper. The total smartphone shipments were 124 million units and top 5 smartphone players cornered over 70% of the market.
Some of the top players have also started making a strong push into the premium segment. According to a recent IDC report, OnePlus has grabbed an astonishing 48 percent share of the premium smartphone market in India in Q4, 2017.
The premium market is defined as phones costing more than INR 30,000 ($465). This market was earlier controlled by Apple and Samsung. OnePlus sells only one model in this market, OnePlus 5T. OnePlus is a subsidiary of Oppo.
Apple has been making a big push in this market for the past few years. But its market share has stagnated at 2%. Apple stock growth depends on the performance of the company in these emerging markets.
Huawei is also trying to expand its presence in the premium segment. In China, its premium segment market share increased to 8% from 2% in the year-ago quarter. Its Mate 10 which is priced at $800 has seen strong performance in China and Europe.
Recently, the company had a setback in the U.S. as AT&T Inc (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) refused a distribution deal citing security concerns.
But it has received good reviews which should allow the company to build a decent footprint in the premium segment in non-U.S. markets.
Beyond iPhone X
Apple has solidified its position in the premium segment with iPhone X. But the company needs to deliver unit sales growth to build a strong ecosystem and boost the potential of Services segment. This can only be possible in the mid-price segment of $400-$600. As smartphone industry saturates, the current consolidation will force major players to expand their market share in mid-price segment through better specs and aggressive pricing.
The double-digit average selling price (ASP) growth shown in the latest quarter was a one-time phenomenon. It would be difficult for the company to move its ASP from $796 to $900 or more as it has already saturated the premium market. The next battleground for Apple is not in the premium category. It is the ability to maintain a decent footprint in the mid-price segment. This segment is providing a big chunk of the unit sales volume for Apple. Losing market share in this segment should be more alarming to investors than the tepid sales volume of iPhone X.
Investor Takeaway
The smartphone industry is undergoing significant changes due to saturation of the market. In China, there is rapid consolidation among top five smartphone manufacturers. Apple used to capture decent market share in the mid-price segment of $400-$600 through its older versions of iPhone. However, it is seeing increasing competition in this space as other players release aggressively priced new models with better specs in this segment.
Apple has already saturated the premium segment. It desperately needs to expand its presence in the mid-price segment to strengthen its ecosystem. Losing market share in the mid-price segment in China will be a big hurdle for Apple as it tries to expand in other emerging markets.
Let’s not forget that iPhone segment makes 70% of Apple’s revenue base and an even higher percentage of its profits. AAPL stock is also closely correlated with the performance of iPhones.
Considering the fact that Apple launched a much-hyped tenth anniversary iPhone in this fiscal, a mid-single to high-single digit decline in unit shipments will certainly make a lot of bullish investors rethink their investment thesis in Apple stock.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
