Apple’s share price plunge reveals deeper problems

Apple stunned the world on January 3 when its shares tumbled nearly 10%, losing more than USD 74 billion in market value. In just three months the company has shed a total of USD 440 billion, which, according to Chinese news publisher 36kr.com (36氪), is equivalent to the market cap of one Facebook, two Coca-Cola or three McDonalds.

The big plummet came on the heels of a surprise revenue warning issued by the tech behemoth which stoked fresh fears for the global economy. Apple CEO Tim Cook said the firm anticipated revenue of about USD 84 billion for its fiscal 2019 first quarter (which ended in December 2018), down by USD 9 billion from the high-end of its initial guidance of USD 93 billion.

The holiday season is usually Apple's strongest quarter, but USD 84 billion revenue represents a 5% drop from the same period of 2017 (USD 88.3 billion), marking its first year-on-year (YoY) quarterly downfall since 2016.

For its revenue crash, the company has pointed to the collapse of smartphone sales in mainland China, Taiwan and Hong Kong. In November 2018, Apple had revealed it would no longer report iPhone sales.

In a letter to investors, Cook has said, “most of our revenue shortfall to our guidance and over 100% of the YoY worldwide revenue decline occurred in Greater China across iPhone, Mac and iPad”. Cook further blamed that China’s economic deceleration sparked by the US-China trade spat has significantly hurt Apple’s sales in the country.

The impending extradition of Wanzhou Meng, CFO of Apple’s biggest competitor Huawei, to US will further fuel tensions. Meng, who is also daughter of the Huawei founder, was arrested in Canada in December 2018 at the request of US as part of probe into Huawei’s alleged violation of trade sanctions on Iran. China has threatened with “grave consequences”.

So Cook is right, but deeper problems exist in the company’s strategic plan.

Paying the price for lack of innovation

Apple suffered a downgrade in smartphone sales after raising prices in the Chinese market, which typically accounted for around 20% of the company’s revenue.

Apple demanded CNY 6500 (USD 950) for the cheapest new iPhones and more than CNY 10000 (USD 1460) for the iPhone X lineup, 36kr.com reported. A USD 1000 smartphone is a luxury that few Chinese consumers have chosen to upgrade to.

Sam Reynolds, a Taipei-based technology analyst, believes consumers’ incentive to purchase new iPhones has declined after iPhone 8: “Apple’s technology advances began to plateau ever since.”

Bigger shockwaves came from its Chinese counterparts, like Oppo, Huawei (华为) and Xiaomi (小米). As cheaper local brands caught up with Apple’s technology, the iPhone maker, which highly relies on tech supremacy to entice customers, began to lose ground in the largest smartphone market.

Cost-effective alternatives, including Google Pixel, Oppo's Flagship X, OnePlus 6 and Huawei P20 Pro, have increasingly gained traction among Chinese buyers, presenting challenges to Apple’s premium products.

Wang Bin, a Beijing-based internet analyst, said, “While being more expensive, iPhone is obsolete compared with many homegrown smartphone brands. Chinese consumers have high requirements for user experience, but Apple’s hardware quality is declining. It seems the company has lost its incentive to be creative.”

WeChat, an extremely powerful app that integrates the features of Facebook, Youtube, WhatsApp, Spotify, PayPal and Netflix into one, has diminished the importance of the operating system in China.

Smartphones are being used just as a platform to run WeChat, and almost everyone in China uses it. Equipped with the app, Chinese users can chat, launch meetings, make payments, join in groups, shop, share information, hail taxis and enjoy diverse services in daily life.

iPhone is only a luxury gadget for Chinese consumers, and Apple’s existing services have failed to impress them. Besides, several Android flagship smartphones have surpassed iPhones in camera quality, extensibility, battery life and lightning-fast charging capability. Apple’s supremacy shall continue to fade unless it makes breakthrough innovations.

China’s “Apple Village” takes the hit

It’s not just the California company and the US stock market that have suffered hefty losses. At a Changshuo (昌硕) factory in Shanghai, workers stand in hot workshops with desperation. Due to the unexpected sales plummet, the iPhone XR production line has been suspended and many workers have left the factory without wages.

The factory, previously run by the Taiwanese electronics company Asus (华硕), employs about 60,000 people. This is where local drivers go to when asked for the Apple village, the company’s second largest factory in the world.

Apple orders are the lifeline of Changshuo. In the past, every time Apple released its flagship products, a large number of temporary workers would migrate to join in the supply chain. But a sense of panic has started to prevail since December 2018, when Changshuo’s five factories in Shanghai were crippled because of Apple’s downgrade. Workers fear their wages would not be settled the day they quit.

Worse still, several component suppliers for Apple are now eyeing emerging markets, like Taiwan and southeastern Asia, to reduce costs. According to 36kr.com, Apple's main partner Foxconn has negotiated with the Vietnamese government to establish an iPhone factory in Hanoi.

Wherever Apple goes, its troubles won’t disappear unless it looks within. Mr Cook should probably begin that exercise.