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Produced by Huxiu Technology Group

Author | Wandushan

Editor | Miao Zhengqing

Header image | Visual China

Apple's Chinese market and the global market seem to be split into two opposite mirror worlds: the more surprising the global market is, the more desolate the Chinese market is.

On the morning of August 2, Beijing time, Apple released its third-quarter financial report for fiscal year 2024 (i.e. the second quarter of 2024). During the period, the company achieved total revenue of US$85.777 billion, a year-on-year increase of 5%, the highest second quarter in history; net profit of US$21.448 billion, a year-on-year increase of 7.88%; diluted earnings per share of US$1.4, a year-on-year increase of 11%.

This series of excellent financial data almost all exceeded the market's previous consensus expectations, but one data was particularly eye-catching: Greater China fell 6.5% year-on-year to US$14.73 billion, becoming Apple's only major market to decline.

Apple's decline in the Chinese market goes beyond this.

In a conference call after the release of the financial report, Cook said that "the installed base of iPhone hit a record high this quarter, and we are very excited about this." However, according to statistics released by third-party research firm IDC last week,In the second quarter of this year, Apple's market share in the Chinese smartphone market fell out of the top five for the first time and was included in the "others" industry.

What also bothers Cook is the deployment rhythm of Apple Intelligence. This week, iOS 18.1 was officially released, and some users can already experience some of the features of Apple Intelligence in advance, but there is increasing evidence that the "Chat GPT version of Apple Intelligence" that users are most looking forward to will be delayed.

As for the "Chinese version of Apple Intelligence" that domestic users are most concerned about, Cook continued to remain vague, only saying that "we have contacted regulators including those in China and the European Union, and Apple hopes to allow users in all regions to experience relevant features."

At least for Chinese users, the big pie that Apple has painted for AI is almost impossible to chew.

The embarrassing "double kill of quantity and price"

Since the third quarter of last year, Apple's revenue in Greater China has fallen for four consecutive quarters.

But unlike the past few quarters, the current market environment for terminals such as smartphones and PCs is much better.According to IDC statistics, in the second quarter of this year, China's smartphone shipments increased by 8.9% year-on-year. Except for OPPO and Honor, which saw a slight decline, shipments of other domestic brands increased significantly.

Against this backdrop, Apple has not been able to stop its decline in China. The core reason is that the current iPhone is actually absent in some market segments and leading applications.

The most typical example is the foldable screen market. According to IDC statistics, the domestic foldable screen model shipments in the second quarter of this year totaled 2.57 million units, a year-on-year increase of 104.6%. In fact, this market has already gone through the stage of "user education" and even has the precursor of a "price war", but Apple's foldable screen mobile phone still only appears in the revelations of various overseas media.

Although many practitioners have told me that most of the foldable screen models on the market are launched at a loss due to high R&D costs, it is undeniable that currently only foldable screen mobile phones can bring stable market growth to manufacturers.

Another missing piece is AI. Since the beginning of this year, domestic mobile phone manufacturers have followed the footsteps of PCs and proposed the concept of "end-side AI". Different from system-level applications such as Apple Intelligence, domestic practitioners pay more attention to the development of scenario applications, such as image beautification, intelligent writing, and recording summarization.

Sometimes, domestic manufacturers’ interpretation of AI even only appears in specific usage scenarios. For example, the “AI elimination function” that is basically available on new phones is used to eliminate background people in users’ travel photos.

Although these features do not sound as exciting as the grand narrative of Apple Intelligence, they can indeed become important factors influencing the general public outside the Apple ecosystem when changing phones.

In addition to the above reasons, another factor that cannot be ignored is Huawei’s strong return.

In April this year, after the release of the Pura 70 series, some institutions predicted that the inventory of Pura 70 would be slightly higher than that of the Mate 60 series, reaching 13-15 million units. However, one month after the release of this model, a channel dealer told the author that the shipment volume of Pura 70 has far exceeded the performance of Mate 60 in the same period.

According to Canalys, Huawei's shipments in the domestic market reached 10.6 million units in the second quarter of this year, a year-on-year increase of 41%. Considering that Apple and Huawei overlap in the high-end smartphone market, Apple's decline in domestic sales is not unrelated to the latter.

In the conference call for the last fiscal quarter (the first quarter of 2024), Cook mentioned that"The Chinese market has always been the most competitive market in the world," and Apple's competition in China seems to be more passive this quarter.

Apple is not blind to these potential threats. In May this year, Apple officially began to lower the channel prices of the iPhone 15 series. During this year's "618 Big Promotion", Apple launched the largest price cut in history, with discounts ranging from 1,400 to 2,300 yuan for the entire series. The promotion of third-party channels is even greater, but even so, Apple still failed to reverse the situation of "killing both quantity and price".

Even from the perspective of the global market, the performance of the iPhone 15 series is not satisfactory. According to the financial report, the revenue of the iPhone business this quarter was US$39.296 billion, a decrease of 0.94% compared with the same period last year.

Are high gross profit margins about to reach their peak?

It is foreseeable that before the release of iPhone 16, Apple has no effective means to boost iPhone sales, and apart from the iPhone, revenue from other hardware products is also mediocre.

By business division, Mac revenue this quarter was US$7.009 billion, an increase of 2.4% compared with the same period last year; wearable and smart home business revenue was US$8.097 billion, a decrease of 2.3% compared with the same period last year.

Among hardware revenue, iPad became the one that turned the tide. Revenue during the period reached US$7.162 billion, an increase of 23.7% over the same period last year. This was mainly due to the update of the iPad Pro product line, which made it the main driver of hardware revenue this quarter, far higher than the previous industry consensus expectation (US$6.22 billion).

However, it should be noted that the main reason for the significant increase in iPad revenue this quarter is that before the release of the new iPad Pro, the product line had not been updated for 18 months. Although the introduction of OLED screen and M4 chip makes the new iPad Pro the product with the largest hardware upgrade among its peers, it has also overdrawn users' future demand for phone replacement to a certain extent.

It is also worth mentioning the software service business. This quarter, Apple's software service revenue hit a record high of US$24.213 billion, a year-on-year increase of 14%, setting a new record again, and its share of Apple's total revenue also further increased to 28.23%.

But amid the high growth, Apple's software service business also hides a hidden concern.

First of all, it needs to be explained that according to Apple's statistical caliber, Apple Music, iCloud, Apple Pay, Apple Card, and advertising are all included in this category. The highest proportion of them is the 30% transaction commission charged to users when they make "in-app purchases", which is the well-known "Apple tax" to the public.

In many countries and regions, resistance against the "Apple tax" has become a trend, led by official regulatory agencies.

Take the EU as an example. Since last year, the EU has imposed many restrictions on Apple through the Digital Markets Act. So far, Apple’s concessions in the EU include:

• Starting from iOS 17.4, third-party app stores are open to users in the EU

• Reduce the "Apple tax" for developers in the EU from 30% to 17%

• Free development of NFC payment for third parties

Outside of Europe, the governments of Japan and South Korea are also currently drafting bills to reduce or limit the "Apple tax."

Judging from the data, compared with the past three quarters, although the revenue from software services has grown steadily on a quarter-on-quarter basis, the growth rate has shown a slowing trend.

It is worth mentioning that Apple's gross profit margin in its hardware business has remained basically unchanged in recent years, maintaining around 36%-37%, but the overall gross profit margin has reached a historical high of 46.1%, driven by software services. As policy restrictions on software services are increased, it may be difficult for Apple to maintain its high gross profit performance.

With AI, everything will be fine?

In a conference call after the earnings report was released, Cook excitedly stated that "Apple Intelligence provides users with another compelling reason to upgrade."

But at the same time, Cook also disclosed a key piece of information: the integration of ChatGPT and Siri is expected to be completed by the end of this year, and Apple is planning to launch the Apple Intelligence function in stages.

This seems to confirm the judgment of Mark Gurman and others that Apple Intelligence will be delayed. If Apple Intelligence cannot be pre-installed on the iPhone 16 released in the fall, it may have a certain impact on its sales.

In addition, Cook still has not given a positive answer to the question of how Apple Intelligence will be implemented in China.

Of course, the industry did not have much hope for this before. In mainland China, Apple's cooperation with third-party big models has become a foregone conclusion. But it remains to be seen what kind of gains these domestic third-party models can bring to iOS. Referring to the domestic version of Samsung S24 models that have been launched, although equipped with functions tailored for it by companies such as Baidu and Meitu, the market response is relatively average.

This involves a problem of "search source": the Gemini Nano model equipped with the overseas version of the S24 model uses "all web pages that can be found on Google" as its search source. In comparison, the domestic customized model is much more limited in its search source.

In addition, even if domestic iPhone models are equipped with "local third-party models", Apple will definitely retain the basic functions of Apple Intelligence, such as voice assistant.

But this will lead to the problem of "mutual calls between models". For example, calling a function through a voice assistant requires access to a third-party model API. Previously, an industry insider told the author that the current trend of smart terminals is that the traditional GUI (graphical operation interface) is being continuously diluted, accompanied by the enrichment of interactive forms and the reduction of application operation levels, all of which require high-frequency access to different models.

According to Apple's tone, a closed and deeply integrated ecological structure is the prerequisite for bringing all products to market, which is a big challenge for Apple.

Even if we ignore the special circumstances of the Chinese mainland market, considering that Apple Intelligence has not yet demonstrated the qualities of a "killer app", it seems that there is still a question mark as to whether users will buy into it in the future.