Apple Could Be Facing Another China Headache – The Motley Fool

By | December 25, 2018

The ongoing trade war between the United States and China could be set to take a significant toll on Apple‘s (NASDAQ:AAPL) business.

Per a report from Nikkei Asian Review, following the arrest of Huawei CFO Meng Wanzhou in Canada at the request of the United States, “[many] Chinese businesses have told employees they will receive subsidies if they buy Huawei smartphones to aid the company.”

People gathered outside of Apple's Nanjing store.

Shoppers outside Apple’s store in Nanjing, China. Will the crowds thin out? Image source: Apple.

Those subsidies are said to be between 10% and 20% of the purchase price of the devices, although the report says that “some [companies are] even covering the full amount.”

Here’s why, if you’re an Apple shareholder, this news should give you pause.

Apple’s China exposure

Apple does a great deal of business in China. According to the company’s most recent annual filing, it generated nearly $ 52 billion in revenue from the Greater China region — about 19.6% of sales — in fiscal 2018. Out of the five geographic regions that Apple provides revenue for, Greater China represents the third largest, following Europe and the Americas. 

Region Apple Fiscal Year 2018 Revenue  Share of Sales
Americas $ 112.1 billion 42%
Europe $ 62.4 billion 24%
Greater China $ 51.9 billion 20%
Japan $ 21.7 billion 8%
Rest of Asia Pacific $ 17.4 billion 7%

Source: Apple data from 10-K filing.

It’s also worth noting that Apple attributed the more than $ 7.1 billion year-over-year increase in Greater China revenue that it enjoyed in fiscal 2017 “primarily to higher net sales of iPhone and services.”

Apple doesn’t disclose how much revenue it generates from each of its product categories by region, but it’s important to note that nearly 63% of Apple’s fiscal 2018 sales came from the iPhone.

For some perspective, Huawei (as well as other Chinese brands like Xiaomi) has already been making life difficult for Apple’s iPhone business in the Greater China region (as well as worldwide). According to market research company IDC, Huawei saw its smartphone market share in the People’s Republic of China grow from 16.4% in 2016 to 20.4% in 2017. Apple’s share dropped from 9.6% to 9.3% in that same period.

So, it’s not as if Huawei wasn’t already a problem for Apple and that now, as a result of the arrest of Huawei’s CFO — which surely won’t improve the strained U.S.-China trade relations — Apple has to deal with Huawei. Instead, Huawei was already a fierce competitor, and now the competition in a large market looks even tougher for Apple.

What can Apple do?

We’re already seeing Apple trying to boost sales in various regions with aggressive trade-in offers. Indeed, Apple news site 9to5Mac reports that on Dec. 21, the company “launched a iPhone XS and iPhone XR trade-in promotion offer in China, including a prominent banner on the Chinese version of Apple.com’s homepage.”

This, the site says, “is similar to what we have seen Apple aggressively promote in the United States.”

Beyond potential short-term tactics, Apple’s best chance of success in China (and, frankly, worldwide) is to make sure that it builds compelling products that customers are willing to pay significant premiums for. Many China-based smartphone vendors, including Huawei, launch new devices at a more rapid rate than Apple does. And they are, in some cases, adopting new features and technologies before Apple does. (One example: Huawei’s highest-end smartphones ship with triple rear-facing camera systems, while Apple’s top iPhone XS and iPhone XS Max ship with dual cameras, and the iPhone XR ships with a single camera.)

Ultimately, it’ll be interesting to see how Apple copes with this latest headwind, but there don’t seem to be any easy solutions.

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $ 150 calls on Apple and short January 2020 $ 155 calls on Apple. The Motley Fool has a disclosure policy.

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