Apple's Message To China: It's Not Me, It's You

Chinese customers shopping in an Apple store on Jan. 3, 2019 in Beijing, China. 
Apple roiled the markets last week when CEO Tim Cook caught many by surprise and reduced the company’s revenue forecast. He attributed the drop to slower economic growth in China, which prompted a bevy of news stories on the country’s slowing economy. But put me down as skeptical. China’s economic growth rate might not be a major factor here, if at all. Here are four quick thoughts on the topic:
First, be careful of exculpatory statements. When a CEO proclaims that results will be off solely because of factors outside of his control, this is usually a giveaway. Of course, no company is perfect and no CEO is perfect. But Cook is essentially saying, “This is not my fault. It’s not me, it’s you (you being China).” The problem with this explanation is that China has become more prosperous and tech-oriented since Apple entered the market, making it a more promising market for the tech giant from Cupertino. Apple has simply been unable to fully leverage the market’s potential. 
Second, Apple might be good at everything, except competition. Steve Jobs’ view was that if your product was sufficiently advanced and if you brand were sufficiently cool, there would be no such thing as competition. Indeed, in many markets in which Apple operates, it has no direct competition. It is its own category of devices and gadgets. You go there because there are no viable alternatives. There is no competition from France, the U.K. or Germany, for example. Not Nokia nor Blackberry. Sure, Samsung and the broader field of Android are competitors, but Apple’s dominance resembles that of IBM in the personal computer market back in the 1980s (you see the problem): There is no other game in town.
In China, there are brands that can go head-to-head with Apple, both in terms of technology and the buzz factor. Nobody was cooler than Steve Jobs at a new product launch, with the stage all to himself and attired simply in a black turtleneck. But that doesn’t mean other brands can’t do the same. Sure enough, Xiaomi CEO Lei Jun started doing new product launches with the stage all to himself and attired in a black turtleneck. If this defines your brand, might be time to refresh.
Xiaomi CEO Lei Jun attends the launch of the new Xiaomi smartphone at National Convention Center on July 22, 2014 in Beijing.
Third, is the “replacement” marketing model still valid? Every Apple consumer probably doesn’t need a replacement phone every time a new model is introduced. China has a strong tech culture, a strong youth culture, a strong consumer culture, and a strong novelty culture. And the Apple iPhone sat right in the middle of this four-element Venn diagram. But what happens when Apple’s mystique begins to fade in the eyes of consumers? China’s youth culture is still present for now, but demographics show that the society is aging. Being the hippest person in the room is no longer as important as it once was. Consumer culture is still important, but saving money has its merits, too. Consumers don’t need new iPhones, but they may very well want them, which are two very different matters.
Fourth, where is your Mercedes 190? In other words, what is your defensive strategy? There are plenty of strategic markets in the world, and there are plenty of poor markets (characterized by consumers with lower than average purchasing power). But China is the only market that is both strategic and not yet wealthy. Apple was used to competing in the other developed markets, primarily Europe and Japan, and never developed a special product or brand or pricing strategy for China. We can treat China the way we treat wealthy markets. The trouble with this strategy is that it fails to account for the bulk of the consumer market, the aspirational middle-class that would love to own an iPhone, but can’t afford to buy one. So, in walks the local competition.

No need to spend $1,200 on an iPhone when you can spend $800 on a Huawei or a Pixel 3, And you can spend the money that was saved on a new pair of Nikes and still have money left over. Mercedes has a powerful brand and in many respects it also dominated its category. But when BMW and Audi started creeping up the value chain, Mercedes realized it needed to be able to speak to a different segment of consumers, so in 1982 they brought out the first compact Mercedes-Benz, the 190.  Did Apple successfully develop a less expensive product for China or did it simply cede the bulk of the market to local competitors?
To be fair to Cook, China’s growth is indeed slowing though it remains in positive territory. But Apple’s problem in China is not China, it’s Apple.


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