CXO

Apple's remarkable China success lost in earnings translation

Apple has done what virtually no other company has done: figure out how to make money in China. Lots of it.

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Image: James Martin/CNET

The one big blemish in Apple's earnings was made in China. As reported in its Q2 earnings, Apple's revenue in China dropped 14% year-over-year and 34% quarter-over-quarter. The big slip comes from the iPhone, which must compete with Chinese brands Oppo and Vivo, among others, leading one analyst to declare Apple has "hit a ceiling" in China.

Lost in this hand-wringing, however, is an amazing accomplishment: Apple seems to have cracked the code on selling to China. The very fact that Apple can sell premium products like the Mac and iPhone in China, coupled with an ability to sell services, demonstrates unparalleled brand power.

Tim Cook: "Services is just on a tear there"

On its earnings call, Apple CEO Tim Cook called out positives from Apple's performance in China. Even though the company's iPhone sales took a hit, Services grew double-digits in the quarter, as did the Mac.

SEE: How Apple will have to earn its next $1 trillion in the cloud (TechRepublic)

In a CNBC interview, Cook offered more detail:

When I back up from China, what I see is the Mac business grew 20%. You know, this is extraordinary. The Watch grew nicely. Services is just on a tear there. Chinese developers have really done a great job of delivering apps that people really want there.

Services..."on a tear." I can't think of another tech company that can boast of any sort of a "tear" in China beyond "tearing our hair out." This is a market that historically hasn't paid for software, and barely pays for hardware. It's a tough market for Western companies, but Apple made over $10 billion there last quarter, registering double-digit growth in a PC market that is in decline globally, and has never paid much in China. It's also registering double-digit Services growth.

It's time to recognize just how remarkable and unprecedented that is.

iPhone: Just another phone in China

Ironically, the strongest area for Apple globally—the iPhone—is likely to be its weakest link in China. This isn't because Apple isn't doing lots of things right, but rather because, as Stratechery analyst Ben Thompson has pointed out, neither iOS nor Android really commands much lock-in in China. WeChat, he posited, not the operating system, is what Chinese consumers are locked into, and it's a simple login no matter the OS ("For all intents and purposes WeChat is your phone" in China).

SEE: How Apple's services business stacks up against subscription-based rivals (ZDNet)

WeChat is how Chinese consumers get a variety of services, but Apple should continue to compete nicely by enabling third-party developers to build apps that enrich the Apple ecosystem, making it sticky even as WeChat attempts to make the OS irrelevant.

I've argued for years that Apple's Services business is the key to its growth over the next decade. Nowhere is this more true than in China. As stated, Apple's ability to sell hardware in China is almost unprecedented, but its staying power and sustainable growth will come from its Services business. To do this, it's going to have to figure out how to complement and, at times, outflank WeChat, but so far it seems to be achieving this.

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About Matt Asay

Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.

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