Can Apple Fix Its ‘China Problem’?

Tim Cook in China

Apple is a profitable company. Even when it’s hit with a disappointing year (for itself and especially for Wall Street), the company is still raking in truck loads of money.

The latest quarterly earnings were good. They could have been better, just by default, especially when the limit for a company like Apple seems to be, well, basically space, but there’s an outlier for Apple that seems to be weighing down the whole show: China. The country is a huge potential earnings pool for the Cupertino-based company, but, as many continue to point out when given the opportunity, Apple has a “China problem.”

That problem, as written up by Ben Thompson, isn’t actually a competitor to its smartphone business, like Samsung, or even the homegrown upstarts like Huawei or Xiaomi. No, while those companies are certainly doing well for themselves, it’s actually a piece of software that seems to be the weak spot for Apple in China.

Specifically, WeChat.

Thompson has a better grasp on the Chinese culture than I do, and Daring Fireball‘s John Gruber goes to bat for Apple’s iPhone lineup in the same way that I would. I don’t believe that changing the hardware of a smartphone is all that vital on a yearly basis. I know that there are people out there that would disagree, but I, like Gruber, don’t think smartphones (even the iPhone) need to be outfitted with an altogether new form factor every single year to not be boring.

Thompson’s article points out that Apple’s biggest problem in China isn’t smartphone competitors, but rather the fact that WeChat is the single most important part of a smartphone owner’s experience. So much so, in fact, that he adds a crucial footnote:

“Or, to put it another way, the operating system of China is WeChat, not iOS/Android.”

Thompson cites statistics that show owners of an iPhone that bought a new device in 2016, only 50 percent of them actually chose a new iPhone to replace their current model. The other half of that statistic says that they switched to an Android phone. And these stats are represented in a separate Business Insider article that shows data between 2014 and 2016, where iPhone loyalty/retention hovers in the mid-50s.

To compare, in the United States iPhone loyalty (where iPhone owners buy another iPhone when it’s time to upgrade) sits at the mid-to-high 80s, while in a place like Japan iPhone loyalty has found solid footing in the mid-70s. Meanwhile, China’s iPhone loyalty is apparently borderline nonexistent.

Some would argue that it’s due to the fact Apple’s new phone cycle has an “off year,” where we see the “s” variant launched, which doesn’t change much (or anything) from the previous iteration’s design, but rather just improves features under the hood. The elements that a passer-by couldn’t see just by looking at the phone. Thompson says this does play a role in why China is losing iPhone buyers and loyalists as well. Apple is simply not upgrading quickly enough.

Like I said earlier, I don’t know that I would say this is as big a deal as many make it out to be, because I’m someone that’s not so reliant on the hardware itself, and simply prefer to use iOS and the apps available on the platform versus, say, Android. Basically iOS keeps me coming back to the iPhone, and upgrading to a new device every year just means I’m getting better specifications to go along with that iOS experience that I prefer.

Thompson’s argument here, and, again, I don’t have any reason to argue with him because he has tapped into that region (he lives in Taipei and visits China regularly), is actually the Chinese consumer is basically bored with the iPhone because it can’t be recognized as a fashion symbol or status symbol every single year (with each new iteration). But, at the very same time, points out that the other reason why Chinese smartphone owners don’t care if they stick with the iPhone is because they can get WeChat on an Android phone, too. So if they can’t get the status symbol with an iPhone, and if WeChat works better on Android devices, there doesn’t seem to be any reason for them to stick with Apple’s brand and products.

“The fundamental issue is this: unlike the rest of the world, in China the most important layer of the smartphone stack is not the phone’s operating system. Rather, it is WeChat. Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and that integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also off is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).”

As Gruber notes, there are even more questions here, because if WeChat is the cornerstone here, wouldn’t smartphone owners in China just hold onto their current iPhone, using WeChat, and wait a bit longer to get that newly revitalized iPhone that’s inevitably coming down the pipe? The stats show us that 50% of iPhone buyers just simply dropped the iPhone altogether and went with a competing product.

So, what’s the fix? If the problem is just a hardware one, where the iPhone is too boring to stick with year after year, maybe Apple has to figure out a way to change the design in a meaningful way every year to stimulate purchases in China. Which could mean new designs for the iPhone every year across the globe, too. This doesn’t seem likely, though, considering Apple takes its sweet time when it comes to every aspect of design, from software to hardware, and changing the iPhone design in a huge way every year just doesn’t seem likely.

Additionally, if it is a hardware issue, then it seems likely that we should see purchases of the iPhone skyrocket in China with the launch of the iPhone 8, if all those hardware rumors are true.

If the problem is, so to speak, WeChat, and therefore smartphone buyers don’t feel a connection to any hardware manufacturer, that seems like a problem that’s harder to fix. Especially if WeChat works better, with more features baked in, on the Android platform. (Does it? An Android user that uses WeChat, and who has tried out the iOS version, let me know, please.) Maybe Apple buys WeChat and starts to expand features on the iPhone, and iPhone only. Though, that seems like it would backfire much faster than it would be promising for Apple.

How do you think Apple can fix its “China problem?” Is this something that Apple simply has to live with in doing business in China? Or is there something you believe Apple can change to keep smartphone buyers loyal to the Apple brand?