Everyone knows how much resource producers and luxury goods makers have come to depend on the Chinese market for growth and profit, leaving them increasingly vulnerable to any slowdown in demand. Now, mighty Apple is putting itself in the same wave-tossed boat.
Apple's sales to what it calls "greater China" – a category that includes Taiwan and Hong Kong – jumped slightly more than 70 per cent in the latest quarter to $16.8-billion (U.S.) from the corresponding period a year ago. That vaults China ahead of the whole of Europe as the company's second-largest regional market; and it's closing fast on the Americas. Just five years ago, Apple's sales in China totalled $2.8-billion for the full year.
The surge stems from Apple's wildly successful drive to boost iPhone sales in the world's leading smartphone arena. Apple didn't make serious inroads there until it reached deals with key carriers such as China Mobile, which has more than 800 million subscribers, and then decided last September to peddle its pricey larger-screen models to Chinese consumers. They snapped them up in record numbers, outstripping iPhone sales in the U.S. in the quarter and vaulting Apple into the market lead in China.
So rival Samsung Electronics, which was already bleeding from assaults by Chinese makers at the lower rungs of the price ladder, can say goodbye to its onetime domination of the world's strongest smartphone market. Chinese shoppers' embrace of the iPhone 6 and 6 Plus – it became the hot Chinese New Year's gift this February – was a key reason for the South Korean electronic giant's 39-per-cent decline in earnings in the first quarter.
Samsung reported Wednesday that its mobile business posted a quarterly profit of 2.74 trillion won ($2.57-billion U.S.), a steep 57-per-cent drop from a year ago. Samsung still topped Apple in total smartphone sales. But the U.S. powerhouse made huge gains at its expense in the more profitable larger-screen segment preferred by Chinese speakers for texting and video. Before last fall, Samsung had most of this market to itself and Apple ranked a miserable sixth in smartphone market share behind Samsung and four Chinese rivals.
Its sharp reversal of fortunes in China underscores Apple's heavy reliance on the iPhone to keep its growth engine running on all cylinders. Smartphones now deliver more than two-thirds of the company's profit. That sounds remarkably like the game plan of the old Research In Motion, which eventually got flattened by the Apple steamroller.
Apple is even stealing business from itself, as subscribers move up to the bigger-screen models and find they can do without their iPads. Sales of the groundbreaking tablets declined 23 per cent to 12.6 million units in the quarter, continuing the downward trajectory of the previous four quarters.
Trend-loving Chinese consumers could also flock to the Apple Watch. But when it comes to such products, all but the wealthy purchasers of luxury jewellery have typically been content with knockoffs. And smartwatches bearing remarkable similarities to the newest Apple product line have been cropping up on various Chinese online retail sites for as little as 10 per cent of Apple's average price tag.
Fortunately for Apple shareholders, the cloud-savvy U.S. tech giant has other revenue streams, including its reliable Macs (whose sales climbed 10 per cent in the quarter), and ideas for more products and services in various stages of development. It also happens to be the world's most profitable retailer. But for now, it's the iPhone that is doing the heavy lifting.
That won't be a problem for a while. Apple will continue raking in hefty revenue from its larger iPhones and may well break profit records this year (with the arrival of version No. 7) and next. But as its prime markets become saturated and it has done all it can to induce consumers to upgrade to the latest expensive model, it will become harder to deliver the remarkable results investors have come to expect.