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The fascinating reason why iPhone sales are slumping in China

iPhone 7 China

Per usual, Apple’s earnings report last week gave us a whole lot of information to digest. In a broad sense, Apple’s performance during its 2017 March quarter was extremely solid, though not quite impressive. While quarterly revenue increased marginally, iPhone sales for the quarter saw a 1% decline year over year, something Tim Cook attributed to the proliferation of iPhone 8 rumors.

Delving deeper into Apple’s earnings report, there was one particular data point that stood out — plummeting revenue in China. Interestingly enough, Apple managed to increase its revenue in each of its geographic operating regions, save for China. So while revenue in the Americas, for example, increased by 11% year over year, revenue from Greater China fell by 14%. Looking at the data from an even wider lens, revenue from China during the March quarter fell by 33% from 2015 through 2017; and though this revenue tally encompasses the entirety of Apple’s product line, it stands to reason that a significant drop in iPhone sales is why Apple’s performance in China last quarter lagged behind every other region in the world.

Bolstering this theory, Apple during its recent earnings conference call noted that the company saw “strong double-digit revenue growth from both Mac and Services” in China while adding that revenue from its retail stores in mainland China climbed 27% year over year. Mac revenue in particular increased by an impressive 20%. Nonetheless, one can only assume that slumping iPhone sales are outweighing Apple’s gains in other product areas.

On a device level, Tim Cook noted that the iPhone 7 Plus did well in China but that previous generation iPhones “didn’t perform as well.”

Seeking to help contextualize and make sense of the drop in iPhone sales, Ben Thompson over at Stratechery has a fascinating and informative post detailing why the iPhone/Android divide isn’t as relevant in China as it is elsewhere in the world. Whereas smartphone users in the United States, for example, tend to be beholden to either iOS or Android, smartphone users in China are more likely to be platform agnostic. Instead, they are reportedly beholden to an app called WeChat that’s available on both mobile platforms.

The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat. Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and that integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also off is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).

There is nothing in any other country that is comparable: not LINE, not WhatsApp, not Facebook. All of those are about communication or wasting time: WeChat is that, but it is also for reading news, for hailing taxis, for paying for lunch (try and pay with cash for lunch, and you’ll look like a luddite), for accessing government resources, for business. For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.

That being the case, Thompson explains that there are few adverse ramifications that result from switching between iPhone and Android, and vice versa. So whereas iPhone users tend to stick with the iPhone due to iOS lock-in, the lock-in in China seems to center exclusively on WeChat.

None of that lock-in exists in China: Apple may be a de facto monopolist for most of the world, but in China the company is simply another smartphone vendor, and being simply another smartphone vendor is a hazardous place to be.

Looking ahead, Apple may be able to reverse course with the iPhone 8. As mentioned above, the iPhone 7 Plus did extraordinary well in China given its position as a premium device. That being the case, it stands to reason that the iPhone 8, which will likely represent the greatest leap forward in iPhone technology we’ve seen to date, will become the most sought after iPhone model to ever hit China.

As a final point, it’s worth mentioning that Apple is far from the only smartphone vendor to experience a huge drop-off in sales in China last quarter, with Samsung shipments in China reportedly dropping by a whopping 60% year over year as more localized smartphone brands gained in popularity.

A life long Mac user and Apple enthusiast, Yoni Heisler has been writing about Apple and the tech industry at large for over 6 years. His writing has appeared in Edible Apple, Network World, MacLife, Macworld UK, and most recently, TUAW. When not writing about and analyzing the latest happenings with Apple, Yoni enjoys catching Improv shows in Chicago, playing soccer, and cultivating new TV show addictions, the most recent examples being The Walking Dead and Broad City.

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