Apple struggles in emerging markets

When Apple officially launched its latest iPad in China last week, the big crowds and long lines seen at earlier such events were absent. A trademark dispute had delayed the iPad's Chinese release but even in March, when the new tablet became available in the country through unauthorised resellers, retailers complained they had to slash prices 30 per cent in the first week because consumers were unenthusiastic.

Fears among some investors that Apple's magic is wearing off in China, its second-largest market after the US, were compounded by last week's third-quarter results. Announcing a rare miss of analysts' overall revenues and earnings forecasts, Apple said revenue in Greater China slid 28 per cent to $5.7bn in the three months to June 30 compared with the preceding quarter. The June quarter in 2011 had seen revenues from Greater China – which consists of China, Hong Kong and Taiwan – jump sixfold.

Although Chinese sales were still 48 per cent up from the same period last year, with iPhone sales doubling year on year, the dip has scratched the shiny surface of a seemingly invincible brand and raised questions about how well Apple is doing in its most important emerging markets.

Tim Cook, Apple's chief executive, said on Tuesday that there was no "obvious economic issue" holding back growth in China. But some observers believe that the Chinese addiction to Apple products is fading because consumers are getting spoiled for choice and are becoming more price-sensitive because of the slowing economy.

Samsung, which had already been taking share from Apple in the Chinese smartphone market last year, has kept pushing out new models with equally attractive design and features but lower price tags. Huawei, the Chinese telecom equipment maker that is diversifying into consumer gadgets, offers sleek smartphones at a fraction of the price of the iPhone.

"It is very clear that Android is hoovering up market share in emerging markets," says Benedict Evans of Enders Analysis.

At least in China, Apple has succeeded in creating a substantial market whose growth rate Mr Cook now calls merely "incredible", as opposed to "off the charts" in past quarters. But some analysts see Mr Cook's comments on India, where the iPhone is struggling to make headway, as more concerning for Apple's longer-term growth prospects as US and European smartphone markets become saturated.

"I believe that Apple has some higher potential in the intermediate term in some other countries," Mr Cook said in response to an analyst's question on India. "That doesn't mean we aren't putting emphasis in India, we are. That business is growing. The multilayer distribution there really adds to the cost of getting products to market."

What goes for India also goes for other emerging economies, says Horace Dediu, an independent mobile analyst at Asymco.

"It's the first time the company has made a clear signal as to why they don't penetrate in India and I think that applies also to Africa, parts of Asia and eastern Europe," he says.

The large number of links in the retail distribution chain, spotty 3G coverage, a dearth of credit cards to buy apps and music from iTunes, and lower operator subsidies for new phones make all these regions harder for Apple to apply its "integrated" model, Mr Dediu says.

"They are constrained on options," he says. "As an observer, I'm growing increasingly impatient with their inability to crack this nut."

Although most of India's phones are unsophisticated "feature phones", Apple's smartphone market share there is 3 to 4 per cent, with 45 per cent held by devices running Google's Android software. That compares with the US, where as many as half of smartphones sold are iPhones.

In India's price-sensitive markets, iPhones remain either the reserve of the wealthy or are relegated to the second-hand or black market.

Sunil Kashyap, 27, says the latest model – at nearly Rs39,000 ($706) – is well outside his budget.

"I like Apple; all my friends think it's cool," he says. "That's why I bought an old model from a friend for Rs10,000 because otherwise it's just too costly."

Mahesh Raul, 25, shows off his new Samsung Galaxy phone to colleagues in the clothing store he works at in south Mumbai.

"Android has a wider variety of apps and of course, it's quite a bit cheaper," he says. "That's what made my choice."

The iPhone's average selling price was $630 during the most recent quarter, according to Canaccord Genuity. Most of the Google-based handsets cost less than $200 and are made by manufacturers unfamiliar to Americans and Europeans, says Benedict Evans of Enders Analysis.

"I don't think Apple is going to compete with these low-end Android smartphones, it's not in their DNA," says Michael Walkley of Canaccord, "but they can tier the 3GS [an older iPhone model] to reach price points that make it more affordable in those markets."

Older iPhones still command high margins, as component costs fall alongside retail prices, opening up less affluent markets without hurting Apple's profitability. But the price of the iPad is falling a lot faster than the iPhone, thanks to the pricing of the iPad 2 at $399, or $100 less than the newer model, which may have contributed to Apple's lower-than-expected margin guidance for the coming quarter.

"Apple invented the tablet category so they are pretty aggressive on price and will take lower gross margins to protect their huge market share," Mr Walkley says.

Many analysts expect the Chinese market to revive later this year when Siri, the voice assistant on the iPhone, is released in Mandarin for the first time, with China Mobile "the country's largest mobile operator – expected to begin selling the device soon.

"I firmly believe that people in emerging markets want great products, like they do in developed markets," Mr Cook said on Tuesday. "Where we can [innovate] and hit more aggressive price points, we are also going to do that."

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