Far exceeding analysts’ forecasts, Apple’s (NASDAQ:AAPL) past quarter earnings blew everyone away. The House the Two Steves Built (Steve Jobs and Steve Wozniak, just in case you forgot) racked up record profits this past quarter thanks to the debut of the larger iPhone 6 line. Indeed, last quarter’s earnings went beyond the expectations of most Apple analysts.
Still, there are clouds lingering over Apple’s long- term prospects in its biggest market. The Chinese market poses key challenges to Apple. While Apple is showing some strength when competing with other high-end manufacturers, notably Samsung, the mobile market in China looks like it’s fundamentally changing. The key nightmare scenario that Apple needs to address is the possibility of the global smartphone market turning into a commodity market.
Let’s face it: Apple is a premium product. The product that you’re really buying when you buy an Apple smartphone is the logo in the back. When it comes to functionality and quality and other buying considerations, you can get those for a much cheaper price with another brand or a no-brand unit. This is the reality that Apple has been so far successful in defeating and side stepping. Well, the moment of truth might come from China of all places. The Chinese market is different from the US market. Apple’s presence in the US market is based on its historical “cool factor”. The same can’t be said of China where 36% of its business comes from.
The big threat in China is from the low-end market. The key player to be wary of is not Samsung. Instead, Apple should look over its shoulder and be on the lookout for Xiaomi. This three year-old company has managed to snag a large chunk of the Chinese market and shows no signs of slowing down. In fact, Xiaomi is so in tune with local Chinese preferences and cultural signals that it is in danger of completely elbowing Apple out of the market. While it’s still too early to tell if Xiaomi can succeed at this, just by looking at its trajectory and its growth rate, you can’t help but be worried if you’re an Apple shareholder.
This is why despite the optimism for Apple’s upcoming earnings figures, one should be aware of the potential risk Apple faces in its large Chinese market. If Apple becomes a marginal player in China then its global growth rate probably cannot be maintained. China is a key part of its global game plan, but with the rise of Xiaomi and the peculiarities of the Chinese market with its preference for lower-end products, things look quite challenging for Apple going forward.