When Apple Inc. (NASDAQ:AAPL) declared its financial results for the last calendar quarter of 2018, it was clearly highlighted that mainland China was on the driving seat. Nearly 20% of Apple’s total revenue in Q4 2017 – also called fiscal Q1 2018 – came from China. It was the highest ever revenue contribution from China. Tim Cook was thrilled with the soaring revenue from the Mainland China that reached $17.95 billion in Q4 2017. It was the second consecutive quarter when Apple witnessed growth in the China market.
Analysts also second the thought that Apple’s performance in China in the next few quarters is going to be crucial for keeping the profit margins intact. However, Apple could be staring at the biggest threat from China that could have an adverse impact on its sales, revenue and profit.
The ongoing trade-war between the US and China have started showing signs of potential damages. The recent ban on ZTE and Huawei by the US government may force China to retaliate in a form of banning Apple. It means the world’s most valuable company may no longer be able to sell any of its products in the mainland China. Citing the national security, the China government could force the US to have a taste of their own medicine.
The fast-changing equations and possibilities have led us to take deep dives into the possibilities, market scenario, competition and impact on the company if China shuts its doors on Apple.
China Market: A Formidable Growth Engine For Apple
The homegrown market of is still having the largest impact on the revenue books of Apple. With nearly 40% contribution to the company’s revenue in fiscal Q1 2018, the US market is still bearing more fruits for Apple than any other market. However, if we take a close look at the revenue growth in the US, it becomes evident that the US market is almost saturated, clocked just 10% YoY growth in fiscal Q1 2018.
The penetration of smartphone in the US is all time high and the market has already been declared saturated. With over 170 million iPhone users in the US by the end of 2017, Apple enjoys a lion’s share of the US smartphone user base. However, the growth in iPhone sales in the US is only slowing with each passing month.
In contrast, China is responding well to iPhones. The overwhelming market response to iPhone 8 in China brought Apple back to growth after 18 months of the sluggish sales period. The contribution of China to Apple’s overall revenue is soaring with each passing quarter, and Tim Cook has admitted that as well.
“We had an all-time record for revenue in mainland China,” said Apple chief executive Tim Cook in a conference call with analysts. He further adds, “We obviously grew share for iPhone in the quarter, but we also grew share in iPad and Mac during the quarter, and wearables [Apple Watch] were extremely strong there.”
Mainland China accounts for one-third of total active iPhone in the world, claims the research firm Newzoo. While the latest figure is yet to arrive in a public domain, there were 243 million iPhone users in China alone, as compared to the rest of the world which houses 485 million iPhone users as of July 2017.
Undoubtedly, China was the world’s largest smartphone market with 717.3 million users by the end of 2017. It is estimated that China will add at least 60 million new smartphone users in 2018 to make the total tally 775 million by the end of December 2018. This will be double the size of India, and nearly triple of the size of the USA.
On the other hand, despite such humongous estimated growth, the smartphone penetration in China will still reach to little over than 50% by the end of 2018.
The above figures clearly portray the biggest window of opportunity Apple could ever have. China will be having the most significant impact on Apple’s revenue as well as iPhone sales, and Tim Cook knows about it better than anyone else.
Apple Valuation Tumbles Down, Massive Layoffs
Despite all the efforts Apple may – and will – make to keep its China dream alive, if the government of China decides to play harsh citing the national security reasons, the company will lose 20% of revenue against no gain. Not only the world’s most potential smartphone market will suddenly turn into a walled garden for Apple but also have a direct impact on the company’s stock, which could start tumbling down like never before.
This could have a serious impact on the valuation of Apple, which is hovering US$900 billion and is just a few weeks away from being the world’s first trillion dollar tech company. Apple’s valuation could decline anything between 15% – 20% if China decides to ban Apple as a retaliation of the imposed ban on ZTE and Huawei in the US.
But the damages would not be restricted only to Apple alone. The declining valuation and losing China market will have a direct impact on the workforce Apple has worldwide. The iPhone maker would be forced to layoff 10% – 20% of its workforce that equals up to 27,000 employees.
Boon For Huawei, And May Be For Others
The ban on Apple in China means people won’t be able to buy iPhone anymore. The development will create a massive $18 billion quarterly revenue opportunity for other smartphone OEMs operating in China. However, it would be Huawei which will make the most of the opportunity, as its high-end devices, P20, P10, Mate series smartphones, match Apple’s premium devices. Overnight the smartphone business of Huawei will be doubled.
Huawei captured 19% of total smartphone shipments in China compared to 11% shipment share accounted by Apple in 2017. Still, there is not even a single Huawei smartphone among the five most selling smartphone. iPhone 7 Plus was the second most selling smartphone model while Huawei’s Honor 8 lite was ranked at the eight position.
Oppo would be the OEM that would be benefited most from the ban of Apple products in China. With 18% shipment share Oppo followed Huawei closely in 2017. It also has two of its model ranked among the five most selling smartphone models in China during 2017. On the flip side, unlike Huawei, Oppo doesn’t have any smartphone that could be seen as an alternative to high-end iPhone models.
The China Government May Have The Last Laugh
Banning Apple in China may attract severe damages for iPhone maker, but have little impact on China. Besides Huawei and ZTE, there are no more major Chinese companies operating in the US which has a sizable share of revenue accounted from the US equals to China’s contribution to Apple.
Also, it’s been four years since Chinese has restricted the government agencies from buying any product from Apple. Therefore if the Chinese government decides to retaliate in oppose to the ban on ZTE and Huawei in the US, there would little impact on the local bodies and business that are dependent on Apple. Of course, there would be job losses in China as well as a result of Apple’s shutting down its operations and 21 App Stores, including the world’s biggest Apple Store located in Dalian.