As we collectively marvel over Apple’s Q1 earnings — a record profit for a publicly traded company—we should reframe our focus.
The significance of the iPhone’s performance in Greater China , which includes mainland China, Hong Kong and Taiwan, cannot be overlooked; it underlies both the flagship product responsible for nearly 70% of last quarter’s revenue, and the key growth market responsible for an estimated 36% of global iPhone shipments.
Several key learnings emerge:[more]
For years, a grey market satisfied an unmet demand for Apple products like the iPhone. This underground distribution network was opportunistic as it provided Apple with a low-risk testbed for assessing product affinity and consumers’ willingness to pay a premium for status-bolstering devices like the iPhone — well above the 20% import tax markup in official retail stores. With definitive demand and a ballooning middle class identified, Greater China was targeted by Tim Cook as a must-win key growth market.
Unlike the US, where phablets are perceived as a novelty, the youth demographic in Greater China use their smartphones as an entertainment hub — for movie watching, gaming and socializing—because in the absence of household TVs, a larger screen-size becomes critical. Despite the use case and overseas demand for a screen larger than 4 inches, Steve Jobs was famously opposed to super-sized phones, which he referred to as “Hummers.” Current CEO Tim Cook decided to close the one remaining feature gap when he debuted the the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus. The market in Greater China responded enthusiastically.
Apple stands apart from Google, Amazon and Facebook in its conquering of Greater China. Adhering to a simple business model of selling premium hardware for high margins has allowed Apple to grow unfettered, avoiding the censorship setbacks that frustrated software-based tech superpowers. In addition to an aggressive retail expansion schedule, Apple partnered with China Mobile — the world’s largest wireless provider with more than 800 million subscribers and strengthened the online presence of key retail stores to accelerate sales.
For the first time in its 38-year history, Apple was able to become the leading smartphone vendor in Greater China measured in units shipped, surpassing Chinese vendor and previous leader Xiaomi at No. 2 and South Korean giant Samsung at No. 3. Conversely, Google still substantially trails Baidu in search, WeChat and Sina Weibo lead in social (following Facebook’s ban) and Amazon works to stave off its far-more-profitable online commerce competitor Alibaba.
Apple is the world’s largest company by market capitalization, the most profitable and currently holds the pole position atop Interbrand’s Best Global Brands. We should anticipate that Greater China will become both the leading manufacturing and consumption hub for the company in the near future.
With Apple’s $179 billion war chest of cash, the company could move to formidable vertical integration if it were to acquire human interface manufacturer Synaptics or chipset provider like Intel whose Skylake processors will ship with MacBook Pro computers later this year. Apple will attempt to diversify its revenue sources with Apple Watch and Apple Pay, and will accept continual portfolio cannibalization as a byproduct of innovation.