AAPL Apple Inc

Local suppliers Huawei, Oppo race to release products first with newer features

By Eva Dou 

BEIJING -- Apple has a China problem, and it may only worsen as Chinese smartphone makers offer better products and appeal to consumers to buy homegrown hardware.

Sales in Greater China, which includes mainland China, Hong Kong and Taiwan, fell 33% to $8.8 billion in the quarter ending in June, compared with 112% growth a year earlier. It was Apple's steepest regional drop, and helped drag global revenue down 14.6% -- a second consecutive quarter of decline.

Apple Chief Executive Tim Cook said in an interview that after taking out currency impacts, sales in mainland China were only down 2% for the quarter. Mr. Cook said he was "very bullish" on China in the long run.

But Apple is facing growing challenges in China, a key market contributing a fifth of its revenue. Local rivals including Huawei Technologies Co., Xiaomi Corp. and Oppo Electronics Corp. are increasingly moving from the budget phone market to the high-end segment. Market leader Samsung Electronics Co. has moved to slash phone prices in China in a bid to claw back lost market share in the country.

In recent months, Chinese smartphone makers have scrambled to pre-empt the next iPhone by beating Apple to the punch on features such as dual-lens cameras and brighter organic light-emitting diode or OLED screens.

"This quarter will still be a challenge for Apple," said Canalys analyst Nicole Peng. "Local vendors are very, very strong this quarter."

A prime example is an event scheduled to take place at China's national convention center in Beijing, just hours after the iPhone maker's earnings conference. One of China's most valuable startups, Xiaomi Corp., plans to launch a new smartphone Wednesday with advanced features including a dual-lens camera and an OLED screen, both of which Apple is developing for future iPhones but has yet to bring to market, according to people familiar with iPhone development plans.

Xiaomi has launched a patriotic ad campaign to accompany the phone launch, with posters proclaiming "Made-in-China Smartphones" in bold red characters.

Xiaomi isn't even Apple's biggest problem in China. The smartphone startup's China sales have been eclipsed this year by Huawei and Oppo, which have both launched sleek high-end smartphones in recent months aimed at taking on the iPhone. Huawei's P9 sports a dual-lens camera and a slimmer profile than the iPhone 6s, while Oppo's R9 touts the fastest battery charging on the market. Both devices come in luxury colors: gold and rose gold.

Huawei said Tuesday that it shipped 60.6 million smartphones in the six months through June, up 25% from a year earlier. Apple said it sold 40.4 million iPhones during its quarter, down 15% from a year earlier.

"Huawei and Oppo are recognized as brands as good as Apple," said C.K. Lu, a smartphone analyst at Gartner. "Or not quite as good as Apple, but people don't feel less superior using them."

Apple's China smartphone market share slid to 9% in the second quarter from 12% in the first quarter, landing it in fifth place behind Huawei, Oppo, Vivo and Xiaomi, according to Canalys. The cheaper iPhone SE has done little to boost Apple's sales in China, due to strong domestic alternatives for price-sensitive consumers and as more brand-conscious buyers are likely to wait for the next flagship, the research firm said.

Apple is also facing geopolitical and regulatory challenges in China. Chinese social media circulated reports this month of consumers smashing their iPhones in anti-U.S. protests after China lost a territorial ruling in the South China Sea. China's official Xinhua news service urged calm last week, saying that crushing iPhones was "really not the right method to express patriotic sentiments."

Analysts say such actions will likely have a limited impact on Apple's sales. But they do come amid other political challenges for Apple, such as Beijing's recent efforts to flex its regulatory might, resulting in the shutdown of Apple's mobile book and movie services in China.

China's growing focus on cybersecurity has also damped sales for iPhones and other foreign gadgets, especially among government buyers. Chinese brands such as Gionee have seen this as an opportunity to win security-conscious local buyers. Gionee on Tuesday launched a smartphone running a chip that is encrypted and designed by a Chinese chip maker.

IDC China Managing Director Kitty Fok said part of Apple's recent sales decline in China was due to consumers awaiting the next iPhone, and the true test will be whether Apple can return China sales to year-over-year growth after the launch of its new models, expected in September.

"Apple has very loyal users," she said. "Once you are an Apple user, you usually stay an Apple user."

Meanwhile, it was a different story in India, where iPhone sales rose 51% in the past three quarters compared with a year earlier, Mr. Cook said on the call.

India accounts for a small part of Apple's business, but it represents a huge engine for potential growth. It is set to become the world's second-largest smartphone market behind China, with consumers increasingly upgrading from basic feature phones to smartphones, though most sold are much cheaper than Apple's models.

"India is now one of our fastest growing markets," Mr. Cook said.

--Daisuke Wakabayashi in San Francisco and Newley Purnell in New Delhi contributed to this article.

Write to Eva Dou at eva.dou@wsj.com

(END) Dow Jones Newswires

July 28, 2016 02:48 ET (06:48 GMT)

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