Is Apple's leading smartphone share in China about to falter?
Huawei and Xiaomi are rapidly gaining ground
In the most recent quarter, the iPhone held the largest share of the key Chinese smartphone market with about 25%. Hot on Apple’s heels were Huawei and Ziaomi with the Huawei’s Mate 60 fueling an 83% rise in unit sales in the most recent quarter and Xiaomi’s sales up 33% in the same quarter with Apple’s iPhone sales up only 5.7% in a market that grew 11%.
China is the largest smartphone market in the world representing about one quarter of the world market. Apple’s global market share has been falling for several quarters, dropping from 22% in 2021 to 16% today.
Samsung, Oppo and Xiaomi are taking share from Apple.
Does it matter to the world’s most valuable company? You bet it does. The iPhone comprises over half of Apple’s revenue, about US$200 billion. iPhone margin is not broken out by Apple but is in the 40% range, so margin of somewhere around US$80 billion of the total 2022 gross margin of US$170 billion comes from iPhone sales with additional contribution from services purchased through iPhones by iPhone users. Apple’s tax rate is less than 20% so the iPhone alone comprises about US$64 billion of Apple’s 2022 profit of US$100 billion.
Apple shares trade at 30 times net income at today’s prices. Apple’s 2022 iPhone unit sales were 232 million, 24% of which were sold in China. If Apple losses half of its greater China market share to domestic competitors, iPhone sales would drop by about 25 million units, revenue would fall by US$22 billion and net income would be about US$8 billion lower.
Apple’s 30 x price to earnings multiple discounts sustained growth. While 8% less profit may not be all that material to Apple’s financial integrity, it could see the growth multiple disappear and AAPL stock get re-rated to a slightly above market multiple of (say) 20 times. That is a $1 trillion problem for Apple investors. First out the door would likely be Warren Buffett’s Berkshire Hathaway which holds 130 million shares of Apple.
Is it likely, given the world market for smartphones keeps growing with Apple now focusing on growth in India? Who knows?
But Apple’s success has been its major market share in North America with Android based phones having commanding shares in other markets except China where until now Apple has held the lead. Keeping a major share of the Chinese smartphone market is in my opinion critical to Apple’s market value and the accelerating attack from domestic Chinese competitors seems unstoppable and Apple is becoming persona non grata to the Chinese government. The U.S. assault on Huawei and on Tik Tok citing “national security concerns” may well be warranted by the national security risks but cannot be good news for Apple if it underlies the shifting mood of Bejing towards the iPhone.
It may be that Apple is no longer an “undervalued” stock and the risks are to the downside.