A couple of new headlines are highlighting Apple's (Nasdaq: AAPL) lackluster performance in China in the first part of this year, as the smartphone pioneer falls behind homegrown sensation Xiaomi and takes much needed steps to improve its China App Store. In one of the reports, media are saying that Apple trailed Xiaomi for the first time in the first quarter of this year. Meantime, another report is saying that Apple is embarking on a major drive to recruit more China developers to make local apps for its iPhone, since a strong selection of good apps is key to maintaining its popularity in the market.
Let's start with the first headline that had Xiaomi overtaking Apple in the first quarter, with sales of 10.4 million smartphones for the former versus 9 million for the latter. The report points out that the first quarter figure for Apple was still relatively strong, equaling nearly 40 percent of the 23.1 million iPhones that the company sold in China for all of 2013. By comparison, Xiaomi has been growing much faster since its first smartphones went on sale 2 years ago, with its first-quarter sales equal to more than half of the 18.7 million units it sold last year.
While Apple's first-quarter sales figure certainly wasn't bad, it's worth pointing out that the company launched its latest models late last year and thus should have posted strong sales for the new 5S and 5C in the first 3 months of the year. What's more, the company finally reached a deal to sell iPhones through dominant carrier China Mobile (HKEx: 941; NYSE: CHL) last December, and thus should have also seen a spike in new sales from that partnership.
Against that backdrop, the company's latest performance looks relatively so-so, and the rise of Xiaomi should certainly be attracting attention in Apple's hometown of Cupertino, California. Here again, it's worth noting that Xiaomi aims for a more mid-range user than the premium customers Apple targets. But as smartphone quality rapidly rises and Apple's image dims following several media attacks, many Chinese who might have spent extra for an iPhone in the past might now be willing to consider a Xiaomi or other mid-range models from homegrown rivals like Huawei and ZTE (OTCPK:ZTCOY, HKEx: 763; Shenzhen: 000063).
A lack of compelling offerings from its China App Store may also be cause for concern from Apple, whose iOS operating system (OS) is a distant second in the market to Google's (GOOG, GOOGL) popular free Android OS. According to a new report, Apple has begun to sharply boost its developer relations staff in China over the last year, in recognition that it needs to do more to support new app development for Chinese iPhone users. (English article)
The China build-up dates back to 2011, when Apple first opened a Beijing office to support its China App Store. As part of its effort, Apple has also developed Chinese language software to assist local developers, and half of the iPhone's 500,000 China-based app developers joined Apple's program last year. Still, even after that drive the company only has a relatively modest 150,000 apps in its China store, a tiny fraction of the 1 million apps available to U.S. users.
While Apple is certainly trying to play catch-up, this scramble looks quite typical for a company that consistently tries to use its global strategy without much modification for the Chinese market. That may be a mistake for China, whose sheer size probably justifies a much bigger local investment to develop products and services more suited to local tastes. Obviously it's far too early to write Apple's obituary in China, but I would advise the company to sharply step up its locally based initiatives in the next 2 years or risk being overtaken by Xiaomi and other Asia-based players.
Bottom line: Apple's lackluster performance in China reflects its weak record for customized efforts in the market, which could cause it to lose position to more aggressive homegrown players.
Disclosure: No positions