AAPL Apple Inc

By Tripp Mickle 

For years, Apple Inc. has operated on the assumption that it gets to set the world's tastes. Its struggles in China are causing some close observers of the technology giant to say that needs to change.

The handful of new iPhone models Apple announces every September are a take-it-or-leave-it proposition for global buyers. That formula was rejected in the latest quarter, when Apple's Greater China sales fell 27% to $13.17 billion, prompting an extraordinary revenue warning in early January that sent its already battered stock skidding further.

Some former employees and analysts suggest a more radical change: End Apple's one-size-fits-all-markets approach for products and aggressively push to differentiate its gadgets and software in China from its offerings elsewhere.

The call for change is rooted in the belief that Apple's top-down management system and secretive culture have weakened its China business. Over the years, the company's "Designed by Apple in California. Assembled in China." ethos meant staff in China couldn't always deliver iPhones that fit well with local apps and user habits.

"They're not adapting quick enough," said Carl Smit, a former Apple retail executive in Asia who is now a strategic sales consultant. "These apps and systems are how people communicate in China, and if you don't have seamless integration, the Chinese manufactures have an edge."

An Apple spokesman declined to comment.

On Tuesday, Apple said weak economic conditions and softer-than-expected demand for iPhones weighed on its business in China. Chief Executive Tim Cook said the company is undertaking a number of initiatives to improve its results, including simplifying trade-ins and payment plans. Apple also has lowered prices of the iPhone XR to offset currency fluctuations that it said hurt sales in China.

Creating more customized iPhones for China could help Apple battle increasing competition from local companies such as Huawei Technologies Co. and Xiaomi Corp. It would empower local executives to be more nimble in the face of unexpected events like the U.S.-China trade feud that has soured consumers on American brands.

The China business is among Mr. Cook's biggest contributions to Apple. It has doubled to more than $50 billion in annual revenue since he became CEO in 2011, boosted by the completion of a six-year negotiation he led to bring the iPhone to China Mobile Ltd.'s 600 million subscribers in 2014. The market is Apple's second-largest behind the U.S.

But the rise of Chinese smartphone makers and popular local software systems threatens that success. Huawei, Xiaomi, and others have challenged Apple by launching dozens of products annually aimed at evolving local tastes.

Apple's sales in China first tumbled in 2016, and the business has never fully recovered. Though the high-priced iPhone X helped the region return to sales growth for the fiscal year ended in September, total revenue from China was 12% below its fiscal 2015 peak, making it the only one of Apple's five geographic segments that didn't deliver record annual sales in fiscal 2018.

Apple's team in China pushed executives at its Cupertino, Calif., headquarters to keep pace, former employees said. As early as 2012 and 2013, China staffers suggested Apple introduce phones with a second SIM card, a popular feature in China where many people have a second phone number or travel often.

"We'd say, 'Here's what my consumer wants,'" said Veronica Wu, who worked in sales for Apple in China before becoming a venture capitalist at Hone Capital. But Apple's product executives "were a black box," she said, and the phones that were later unveiled didn't have the features gaining traction in China.

Instead, Apple's product team in Cupertino prioritized other goals such as improving antenna performance, one former engineer said. "They didn't expect SIM to become a competitive differential," the engineer said.

So-called dual-SIMs are now so popular that about 93% of smartphones sold in China have them, according to market-research firm Canalys. But Apple didn't introduce iPhones with dual-SIM capabilities until this past September.

Customizing iPhones for China would carry risks. Apple has generated huge profits by making just a few iPhone models and selling massive quantities, a streamlined strategy established by Steve Jobs. China-specific iPhones would add costs and complexity that threaten profit margins.

There are also brand risks. The luxury-goods industry's push to juice sales in Japan in the 2000s by offering handbags designed in collaboration with local artists backfired because some consumers felt the fashion brands had lost prestige.

"When you sell a brand with cachet, you don't want to do anything that diminishes that," said Richard Kramer, an analyst tracking Apple for Arete Research. "Apple can't afford to substitute local tastes for the massive premiums they get."

Still, other companies long have tailored their products to suit China's enormous market, from Mondelez International Inc.'s green-tea flavored Oreos to General Motors Co.'s joint-venture Baojun brand cars.

Mr. Cook's letter to investors on Jan. 2 didn't specifically detail how Apple plans to address the downturn in China, but said its business there "has a bright future," and noted that the number of active Apple devices in China increased last year and services revenue rose during the December quarter for Greater China, which includes Taiwan and Hong Kong.

China presents a unique challenge for Apple's software, too. People spend much of their mobile time in WeChat, an all-in-one app from Tencent Holdings Ltd. for messaging, shopping, hailing rides and more. That means iPhone users spend less time in Apple's iOS operating system and reduces the difference between it and Android.

Apple was slow to adjust to WeChat's influence. The app helped popularize a mobile-payment system using QR codes, but Apple didn't enable iPhone cameras to scan those QR codes until late 2017 when it offered some of its first software features aimed at China. It also improved the pinyin keyboard, making it easier to type English and Chinese words.

The company is trying to be quicker. In 2017, it named its first executive with oversight for China, Isabel Ge Mahe. She is tasked with monitoring the market to ensure Apple has the right features for Chinese buyers.

The company also recently named a technical lead for its China internet-services group, a team of about 10 staffers listed on LinkedIn who are devoted to customizing more software for China.

Yoko Kubota contributed to this article.

Write to Tripp Mickle at Tripp.Mickle@wsj.com

(END) Dow Jones Newswires

January 30, 2019 05:44 ET (10:44 GMT)

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