Apple Is Not Winning In China

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Apple Inc. (NASDAQ:AAPL) released a stellar earnings report for the first three months of 2014, and the company’s future is being touted as secure on the back of better than expected earnings. The world’s largest smartphone maker is doing well, but assertions that its Chinese performance, seen as a key driver of Q1 beats, will save the company are preposterous. Apple is not winning in China, despite what Jared Newman over at MacWorld wants you to believe.

Parameters have got to be laid down before deciding whether something is a win or a loss. Is Apple outselling competitors in China? Is Apple laying the groundwork for future over competitors? Is the company increasing its takings an impressing investors? The answer to the first question is no, followed by a maybe and a yes.

Why Apple Is Doing China Right

Apple Inc. (NASDAQ:AAPL) is winning under a limited definition of victory. The Cupertino company has done its best to enter into the Chinese market in a way that saves its margins and increases sales. Those increases may not have been all that dramatic in the first three months of 2014, but the year-on-year 13% increase in revenue from Greater China is solid, and beats the company’s across the board growth.

What Apple is doing right in China is brand building. The East Asian giant is likely to be a more important hardware market with each passing year. Right now the iPhone is likely to sell in large numbers in China, and that will pad the financials at Cupertino. Revenue from China now accounts for around 20% of the firm’s total. That’s likely to head higher in future.

There is no doubt that Apple is winning in China when the market is viewed in a certain light. The company is pulling more money out of Asia than it ever has before, and it’s building a quality brand that is likely to extend money making opportunities through the next decade. There are problems in China, however, and wider problems for the rest of Apple Inc. (NASDAQ:AAPL).

Apple Cannot Rely On China

Samsung is still the biggest seller of smart phones in the world, and much of the company’s success comes from the Chinese market. Apple is doing well in China, but it could have gotten in earlier and become the premium device seller. Now it’s forced to compete with Android models that barely affect it sales in the West. That’s a loss for Apple.

In terms of its wider business a win in China is not a victory to rely on. There are several reasons for this. Concentrating all, or almost all, growth in a single geographic segment is a recipe for disaster. China has its own problems, as attested to by KFC and IBM. Apple needs to grow in the West, or its shareholders will begin to peel off in advance of collapse.

Apple’s most recent earnings report showed two of the most important themes at Cupertino in recent years. The first is that the company’s growth is coming from China, being relatively flat everywhere else. The second is that Apple is willing to do a lot of purely financial mechanics in order to keep its stock price high. That’s not the mark of  company that’s winning.

Disclosure: Author represents that he has no position in any stocks mentioned in this article at the time this article was submitted.