A Volume issue – threat from rising Chinese phones hanging over Apple

SAN FRANCISCO (Reuters) – A series of profit warnings from Apple Inc (AAPL.O) suppliers this week has fueled investors' concerns that iPhone sales in terms of volume have hit a wall that could be a problem for company plans to make services the main pillar of development.

For the previous year, investors were largely willing to ignore stagnant iPhone unit sales, as average sales prices continued to rise. However, it faces intense competition from mid-price phones from manufacturers such as Xiaomi Corp (1810.HK).

Apple has often stated its plan to increase its revenue from payment services, such as Apple Music and iCloud. This, at least in part, requires a growing iPhone-based device owners base, which analysts believe it represents about two-thirds of the 1.3 billion Apple devices used around the world.

Wall Street analysts have expressed concerns that slower overall smartphone sales will make it harder for Apple to hold its smartphone market as people postpone the market for generally more expensive phones. This, in turn, could hurt the growth of Apple's revenue, said Bernstein's Toni Sacconaghi.

Without growing volume in promising overseas markets such as India, Brazil and Russia, the concern among analysts and investors is that Apple has at least parts of its strategy wrong with too much emphasis on the premium brand and the high prices that go together her. from $ 1,000 (£ 774.71) for its top models.

Hal Eddins, chief economist at Apple Capital Investment Advisor, said phones such as OnePlus 6T are almost comparable to Apple's high-end phones for nearly half the price. "You can get a lot of phone for much less," he said. "The landscape of the phone is changing rapidly and I think manufacturers are losing a trick by going to the $ 1,000 route."

Apple declined to comment on its strategy, or the share is moving between its suppliers.

Company executives have warned investors in the past against installing them on sparse data points from its large supply chain. Apple, for more than a decade, insisted that its gadgets should not be judged according to their specifications, an argument that sales data shows that Apple was successful.

The company also has satisfied customers and confidence rates that are unmatched in the mobile phone industry, said Ben Bajarin, a Creative Strategies analyst.

Nevertheless, a trio of Chinese smartphone manufacturers – Xiaomi, Oppo and Vivo – accounted for about a quarter of the world market in the first half of 2018, according to IDC, from just 8.9% for 2014 and nearly 20 percent last year.

With the exception of the financial year 2015, Apple did not increase its market share. In the first half of this year, 13.6% of the world market was from 14.8% in 2014, although its share is usually rising with year-on-year sales due to strong sales in December.

The 1.3 billion IPhones, iPads, and Macs around the world serve as a potential customer group for Apple's services – a company that earned $ 37.1 billion in revenue for the most recent financial year.

This represents 14 percent of Apple's total revenue, from 8.5 percent in the autumn of 2015, when iPhone unit sales hit the highs of all time.

However, IDC expects the global smartphone market to grow only 2.4% on a compound basis to 1.6 billion Units by 2022, indicating a saturated market in which the Cupertino-based company in California will compete with opponents for each customer.

In particular, Xiaomi wins the fans quickly. In India, where Apple has little presence, Xiaomi has gained on some aspects Samsung Electronics Co. Ltd (005930.KS) to become the country's leading phone vendor and also to European markets such as Spain, IDC said in a report.

According to IDC, Xiaomi was the top smartphone vendor in India in the first and second quarter of 2018, with 30.3% and 29.7% respectively of the smartphone market there.

"This is the case where it is very different in other parts of the world," said Ryan Reith, vice president of the IDC mobile tracking program, noting that most US consumers are unaware of Xiaomi, Oppo and Vivo .

"Many of these brands do not play (in the United States) but play in places they never played before," such as India and Europe, he said.

SUPPLIERS ARE INSURANCE

In the latest earnings this month, Apple shook investors with lower-than-expected sales forecasts for the quarter of holiday markets and with its announcement that it would stop reporting unit sales for its hardware products, as it is the case for the last 20 years.

Supporting the leveling of iPhone unit sales, it also said it sold 217.7 million iPhone in its most recent financial year, virtually unchanged from the previous year and well below a high of 231.2 million in the fiscal year 2015.

The stock price hit at the time of the forecast has since expanded losses after profit warnings from suppliers such as Japan Display Inc.6740.T), British cement manufacture IQE Plc (IQE.L) and Lumentum Holdings Inc (LITE.O). The stock has now reached about 8% of its earnings on November 1.

Apple's newer models, such as iPhone XS and iPhone XR, prove to be popular with its most loyal fans in rich economies. But they reach $ 1,449 in price – away from many consumers in less developed markets.

Apple's strategy is to attract consumers to their ecosystem with older models at cheaper prices.

He also emphasized that his phones are designed to last longer than the competition, expand repair options and create the latest operating system update to speed up older devices.

However, Chinese smartphone manufacturers are packing their phones with higher-end brands and features such as fingerprint sensors under the glass that seek to attract consumers who otherwise could see Apple phones.

These manufacturers are increasingly adopting Qualcomm Inc (QCOM.O) the most powerful mobile chips, said Cristiano Amon, who is the chip leader of the American chip maker, who is locked in a bitter litigation with Apple.

These phones were originally sold in China, but "we have also seen them earn a share outside China, especially in regions like India and Europe," said Amon.

At home, Apple faces new challenges from at least one Chinese manufacturer, OnePlus, entering the traditionally high pricing area of ​​the US company. Although the iPhone 7 processor chip hits OnePlus 6T in some speed tests published by Geekbench, the OnePlus phone has a sleek, slim design around the screen, similar to the newer iPhone models.

After years of being available in the United States only through an online store and developing one of the enthusiastic technologists, OnePlus 6T is shipped from T-Mobile US Inc.TMUS.O) stores.

At $ 549, it sits between iPhone 7 and iPhone 8 in terms of pricing. Kyle Kiang, North American general manager for OnePlus, said sales of the new model on the first day were 86% higher in the United States than the one of the previous OnePlus released there, although it did not reveal absolute numbers units. He said sales were higher due to T-Mobile's relationship.