Apple (NASDAQ:AAPL) has been a dominant player in the global technology market and has maintained its innovative style to stay ahead of its immediate rivals. The company’s sales graph has been rock solid in the last few quarters, with emerging countries such as China contributing 16% of its total sales in the third quarter of the financial year.
The Cupertino company has also expressed its interest to expand in China recently, in order to grow its market share in the emerging market space. But suddenly there is a war waging between the two superpowers – the U.S. and China - that could adversely impact Apple’s sales in China. So, why and how could it affect Apple’s performance? Here’s how.
The War is Killing U.S. Products in China
According to latest reports, China has posed a ban on U.S. tech products sales in the nation. Chinese government departments have been instructed to stop buying U.S. tech products such as Symantec antivirus, Microsoft (NASDAQ:MSFT) operating systems, Apple smartphones and tablets, and several others. This entire reaction from China was instigated by the U.S. government’s distrust in hardware made by the two Chinese companies – ZTE and Huawei.
- Warning! GuruFocus has detected 8 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
The cold war between the two super powers has kicked off bad times for U.S. tech players operating in China, with Apple being at the top of the hit list. The U.S. government is worried that China has been spying into its security information, and since the two Chinese companies have very close ties with the Chinese government, they have borne the brunt of the U.S. mistrust. While all this spells bad news for the American tech goliath, Chinese players can benefit as China is likely to use this issue to promote homegrown solutions for technological problems.
Apple’s prospects in China
iPhones have gained enormous popularity in China, often said to have overshadowed their popularity in the U.S. Even numbers have a similar story to tell, with around 100 million iPhone users in China. Apple took complete advantage of the boom in the smartphone and tablet markets in China last year, when the number of devices being sold in the market nearly doubled, from 380 million devices in the beginning of the year to more than 700 million by the end of the year.
In the second quarterly earnings call, Apple’s CEO, Tim Cook, stated that iPhone sales in China were up by 28% that quarter. Most of the sales came from first-time buyers and can be attributed to the arrival of upgraded versions of iPhone and the support from the nation’s largest wireless carrier, China Mobile.
Apple has always been very keen on the Chinese market. Despite analysts suggesting Apple should bring out cheaper phones for the Chinese audience, the company continued to manufacture high-end expensive gadgets. Apple was never interested in short-term gains by selling cheaper phones. Instead the iPhone maker wishes to maintain a certain level of quality that it’s famous for and believes this will help in positioning itself for the long haul.
Is Apple still safe?
News sources have confirmed that the Chinese government has upped the stake in its quiet conflict with the U.S. and has banned government spending on 10 different Apple products, including all iPads and MacBooks. The Chinese market had brought Apple nearly $37.4 billion revenue in the third quarter, and thus, this is indeed a hard blow to Apple’s future.
According to Strategy Analytics, China is predicted to become the world’s largest mobile market, in terms of revenue, this year, with sales reaching around 430 million units. A huge chunk of the growth will be triggered by the transition from 3G to 4G handsets, and Apple is a leading provider of such devices. In this situation, the measure taken by the Chinese government could greatly impede Apple’s expected growth.
So far iPhones have not been included in the list of items to be banned in China. However, this hasn’t stopped the analysts from worrying. They feel, because of the recent series of controversies about iPhones posing a potential security threat to China, the Chinese government will soon ban it too. However, if the iPhones don’t feature in the list, even after all such controversies, then Apple might have some chance to revive its business in the geography.
It’s a little early to understand the final impact the decision might have on Apple, since a lot still remains to be revealed. If the iPhone keeps off the banned products basket in China, it will help to lift up Apple’s sales for the final quarter. With the launch of iPhone 6 expected by September this year, Apple might fetch greater heights for itself in the nation. However, a ban on the device can spell doom for the iPhone 6. Let’s keep a tight watch on the next set of updates on the issue to evaluate the damage that might result from the ban.