Apple hopes that affordable iPhone and discounts will help increase demand in China

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Image for illustration
(Reuters)

Image for illustration
(Reuters)

While iPhone retail stores in the U.S. and Europe are closed, China is the only major market where Apple has been able to reopen all stores.

  • Reuters
  • Last update: April 29, 2020, 12:27 p.m.

Apple Inc.’s discounts in China for the iPhone 11 and the launch of a new, affordable SE model have put the company in a better position than its competitors to withstand a decline in global smartphone demand related to corona viruses. While China, which accounts for around 15% of Apple’s sales, appears to be a rare bright spot, investors will be happy to get a picture of global demand when the Cupertino, Calif., Company publishes second quarter results on Thursday.

The iPhone maker closed retail stores in the U.S. and Europe after the COVID-19 outbreak, and China is the only major market where all stores were reopened. Consumer spending is likely to be subdued as the pandemic has paralyzed economies and Apple, the world’s second largest technology company, is better positioned to launch its new price-conscious iPhone model, analysts said.

“Apple is better positioned than most to experience a rapid recovery in a post-COVID world,” said Evercore analyst Amit Daryanani in a research report. “We see demand as displaced, not canceled.” He added that the launch of the iPhone SE, worth $ 399, indicated that Apple’s supply chain was back on its feet after weeks of shutdown earlier this year.

Analysts predict that, according to refinitive data, Apple will post a 6% decline in sales and an 11% decrease in net income in the second quarter of the fiscal year. On the other hand, Chinese brands like Oppo and Vivo, which have constantly chosen to offer high-end models to challenge iPhones, are losing market share when bargain hunters choose Apple.

Earlier this month, several online retailers in China cut iPhone 11 prices by up to 18% – a tactic Apple used in the past to drive demand. While the initial social media response to the new iPhone SE was muted, analysts said demand is picking up. The cheaper iPhone SE could tempt iPhone owners to opt for a newer device that might otherwise have delayed them in a weak economy, said Nicole Peng, who pursues the smartphone sector at Canalys research company.

“People want to avoid uncertainty in a downturn,” she said. “A brand like Apple that can demonstrate quality and less worry people about breakdowns or customer service can attract buyers.”

CHEAP IS GOOD

Early data indicate that the Chinese smartphone market is recovering quickly after the virus and Apple has remained relatively intact. IPhone sales in China rose 21% last year over the last month and more than tripled compared to February as government data showed, meaning that March sales in the country were likely to decrease only 1%.

A recovery in Chinese demand will not make up for the loss in sales in the US and Europe. And the company still has to launch a smartphone with 5G radio technology, as is offered by Asian competitors. This is a disadvantage for Apple. But the same expensive 5G models might not sell well in the current climate of frugality, analysts said.

“If there are no massive subsidies (in China), I doubt that there will be many smartphone users who like to upgrade to 5G,” said Linda Sui, who pursues the smartphone sector at research company Strategy Analytics. Sui expects iPhone shipments to drop by a maximum of 2 percentage points in 2020, while Chinese companies are seeing double-digit declines.

Apple can also draw on revenue from its service business. The company has used its large iPhone customer base to increase revenue from services for music, apps, games and videos. “The Apple Services segment should remain stable in today’s work-from-home environment, demonstrating the longevity of the Apple model,” said Cowen analyst Krish Sankar.

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