Apple is on the verge of significantly improving the state of its relations with China. With the former relying more and more on its services to generate revenue in the country, the establishment of close ties with the local Government has become quintessential. While other firms have chosen to simply back off from that market due to the difficult regulations, Apple has chosen to go the hard way as this might prove extremely beneficial in the long run.
Why does Apple need to take such steps?
Apple’s performance in relation to product sales in China leaves nothing to be desired. As a matter of fact, sales revenue over there has been on the decline for the months of January to March according to their reports. This might not seem like an ordeal but it really is when we take into account the fact that it’s the fifth consecutive quarter in which Apple records negative performances on the Chinese soil. It is so because the consumers are turning more and more towards local manufacturers, in the likes of Vivo, Xiaomi, and Huawei. These firms’ products are reportedly as effective as the Cupertino-based phones but have drastically lower price tags, therefore pushing the iPhone to the fifth place insofar as market share is concerned. As a result, its revenue in China now stands at $8 billion. Although that figure might seem massive, it represents a 9.5% decrease.
Despite the fact that Apple has been underperforming regarding its products sales, its services stand on the opposite side. In fact, Tim Cook’s firm has recorded a double-digit growth in the revenue generated by its services. Thus, it seems logical that Apple will now focus more on this segment while finding a solution to boost its mobiles sales. However, there is a barrier to entry to this market in China: severe regulations, the most significant being that these services need an approval from the government. This is one of the aspects that deterred other firms from continuing their operations there as the regulators are known for being hard to deal with. Another notable element is the fact that a new cybersecurity law is in vigor on the Chinese territory since the 1st of June and it stipulates that firms operating there need to store their user data in the country itself.
How is Apple dealing with that barrier to entry?
The Chinese Government is actually planning to transform the province of Guizhou into a tech hub and Apple is to capitalise on that. The latter is indeed considering the implementation of a data center in the area. This project is estimated to cost around $1 billion and is expected to kill two birds with one stone. First of all, in doing so, the Cupertino-based company will comply with the new cybersecurity law as the new building will allow them to store their user data within China. On the other hand, it will be a real statement of intent towards the Chinese authority as it will demonstrate the firm’s desire to cooperate with them. Therefore, there is no need for investors to be worried as Apple’s situation should only get better with time in China with this long-term strategy. As a matter of fact, the poor performance in relation to the revenue associated with mobile phones only concern China as the firm recorded a growth in sales in all of the other regions in which it operates. As stated by a CMC Markets analyst, Apple’s shareholders have been told by the company’s CEO, Tim Cook, to look beyond what’s happening in greater China.
What is the Cupertino-based company doing in the meantime?
At the moment, Apple is waiting for the release of their next iPhone to see how it performs on the Chinese territory. The firm is far from the performance it recorded in 2015: a share of 14% of the smartphone market. In fact, it only represented 9 percent of the market in the first semester of 2017. However, they are expecting that figure to be improved with the release of the iPhone 8. The latter is reportedly due later this year and the new features it will incorporate will certainly attract the Chinese consumers’ interest.