
Apple’s China Problem - uyoakaoma
https://stratechery.com/2017/apples-china-problem/
======
mikhailt
This seems to confuse some people, the author is not saying Apple have a
monopoly on smartphones. What the author is talking about is the locked-in
ecosystem that Apple owns, iOS and macOS (watchOS/tvOS).

> Moreover, the advantages go beyond margins: the best way to understand both
> Apple’s profits and many of its choices is to understand that the company
> has a monopoly on not just MacOS but even more importantly iOS. That means
> Apple can not only capture consumer surplus on hardware, but developer
> surplus when it comes to app sales; that some apps are not made is
> deadweight loss that Apple has chosen to bear to ensure total control.

The problem that Apple is having in China is that WeChat is the driving
"platform" ecosystem, not the OS or the brand.

In other words, people aren't buying iPhones for its integration with Apple
services in China, which could lead to an increase in growth due to the halo
effects. Instead, they run WeChat and they buy things through there, which
leads to no growth in Apple's services and revenue. Which also means, the
customers have no desire to buy another Apple device. They can do the same on
any device that can run WeChat.

If Microsoft sells a Windows Phone with WeChat as the default app for
everything, they may have a hit in China but it would not be a sustainable hit
because again, WeChat can run on iPhone or Android or any other OS.

~~~
ryanmarsh
How wild is it that it took less than 10 years for a platform spanning killer-
app to emerge in the largest smartphone market in the world?

To put it in perspective, this is like what the web did to Windows circa '99 -
'05\. Lesser examples might be spreadsheets or Adobe Photoshop.

~~~
xiaoma
> _" How wild is it that it took less than 10 years for a platform spanning
> killer-app to emerge in the largest smartphone market in the world?"_

It's not that wild considering that the iPhone hasn't even existed for quite a
decade yet and Android has been around for an even shorter time.

------
gnrlist
Chinese people want the Apple brand they don't care about iOS. If iOS was the
status symbol it would get pirated and installed elsewhere. Apple has a strong
brand because of it's history as a premium device company internationally,
that's all. Their brand was their first mover advantage in China but now
Chinese companies are closing that brand gap and since WeChat rules the
software side Apple is going to have a hard time being a big player until it
can differentiate itself on something other than brand.

~~~
nullnilvoid
Other than the brand factor, iPhone is actually a better phone. Before the
current iPhone I have, I had always been an Android user. I used entry-level
Android phones, high-end Android phones such as Samsung Galaxy, iPhone is
clearly a better phone. iOS feels more smooth, reliable, battery-efficient in
many ways than Android phones. Honestly, I have not looked back since the
switch.

~~~
blacksmith_tb
Without wading into a my-anecdotes-against yours battle, I think most would
agree that at this point Chinese smartphone shoppers have options from Xiaomi
and Huawei among others[1] that are of equal quality to Apple hardware (and
may be better designed for their market).

1: [http://time.com/4547129/china-smartphone-market-oppo-vivo-
xi...](http://time.com/4547129/china-smartphone-market-oppo-vivo-xiaomi-
huawei-leeco/)

~~~
threeseed
The world has access to phones from Xiaomi and Huawei.

If they were equal to iPhones they would be selling out in Ireland, Australia,
Cambodia - everywhere. Guess what ? They aren't equal to iPhones.

~~~
user5994461
Xiaomi are not available for sale outside of China. (Well, not without jumping
through hoops and weird resellers).

They have zero name recognition worldwide and the platform is fitted to the
china market. There are some minor localisation and translation work to go
global. Most important of all: They lack the brand recognition (westerner are
very sensitive to branding and associate china with cheap shit).

Outside of that, they do S6/iphone7 equivalents for half the price.

They could blow away every single android manufacturers single handedly if
they went global.

------
skdotdan
The problem with many tech analysts is that they are Apple fanboys without
even knowing that they are. Stating that Microsoft Surface and Samsung S8 are
not competitors of Apple just because their products don't run Mac OS/iOS is
pure fanaticism at the very least.

Nevertheless, I find that the main point of the article is right. But Apple's
China problem is also a very important problem for Google (actually, it's
worse for Google).

~~~
dmix
The fanboyism is strong on this one.

> iPhone users very rarely switch to Android, while a fair number of Android
> users switch to iPhone

> this is the point that was forgotten the last time Samsung was held up as an
> iPhone threat — a Samsung smartphone does not run iOS. That has always been
> Apple’s trump card

Considering this is a stats blog these bold claims are both made without any
proof. And Android being a far cry from iOS is an antiquated position to take
in 2017. They caught up quite some time ago.

The core difference is usually lock-in from using the Apple eco-system. But on
a UX/hardware value level Apple doesn't have a significant advantage over
companies like Samsung anymore.

But agreed re: the china problem, I wish he focused more on that over making
sweeping statements about Apple's (imaginary) unmatched competitive advantage.

~~~
IBM
Various third party firms have said for years that the amount of switchers
from iPhone to Android pales in comparison to the switchers to iPhone.

Also Apple usually says it themselves on their earnings calls.

------
echaozh
There's a question under which people discuss what would happen if WeChat is
blocked from AppStore on a Chinese quora like Q&A site Zhihu.[1] Tencent
removed a tipping the author feature from WeChat because Apple wanted a share
from the tips, which made the blocking worries more realistic than many people
may think.

The people on Zhihu, possibly the richer and more knowledgeable among the
Chinese internet users, supported WeChat, which is a vital tool for work as
well as everyday life. It's an IM, and when every relative and friend uses it,
it's not possible to switch overnight if Apple actually blocks it. What's
more, its only competitor in China is another product of Tencent, QQ.

So, Apple is facing a huge China problem, and it's trying to solve it.
However, it is yet unclear if it can solve it, or be solved by it. I think the
walled garden policy actually backfires in China. Android, as an open
platform, is not that easy to kill, even though all Google services are
blocked here. However, iOS can. Without a big enough market share, it will die
like IE6, without Chinese developers willing to write apps for it.

[1]
[https://www.zhihu.com/question/58776977](https://www.zhihu.com/question/58776977)

~~~
echaozh
And in China, many iPhone buyers are among the students and blue collar
workers who buy it because it's subtly expensive, coming from a foreign
country (though assembled in China), and was used by richer people. They don't
buy it because it's a good phone, but because it's a luxury.

This is beginning to change, as some Android phones are actually getting more
expensive to appeal to their vanity (well, being more expensive is so much
easier than the reverse), and they're working on a very appealing feature for
the those who mainly use the phone to take selfies and photos of their food:
automatically beautification.

Also, it boosts China's computer vision technology as a side effect, which is
good for us as well.

------
davidf18
In the US at least, most of the phone is paid for by monthly installments as
part of the plan so a phone which might sell for nearly $1K elsewhere appears
to cost only $200 here. That has helped Apple immensely.

For my needs living in NYC with tall buildings, with need for good signal,
voice quality, I use yearly iPhone upgrade on Verizon network. Verizon buys
the $1K iPhone and I pay them back at less than $1.50 per day.

iPhone platforms have greater security than Android based ones and that is
important to me as well.

The iPhone - Mac integration is great and minimizes complexity making my daily
life easier.

Also, where I live, there are many Apple stores including a 24/365 for service
for a device which is essential for my work.

I've had iPhones for 4.5 years and in that time period I've had to replace the
phone 3 times for various reasons. Walking into the store for replacement is
great.

But other people use phones for different reasons and most don't have the same
constraints that I have.

Apparently WeChat in China makes the platform generic for most.

~~~
thaumasiotes
> I use yearly iPhone upgrade on Verizon network. Verizon buys the $1K iPhone
> and I pay them back at less than $1.50 per day

The math here doesn't work. One year ("yearly upgrade") at $1.50 / day means
you're paying Verizon back less than $600 for a $1000 phone. Assuming, of
course, that a year is less than 400 days.

------
iplaw
There should also be an article entitled, "China's Apple Problem." The article
could go many different directions, but I like the contrast between the
titles.

One thought is that it could investigate the impact of big tech firms
capitalizing on the Chinese market from the top down and bottom up. Utilizing
cheap labor and manufacturing facilities to develop extremely expensive
products which are then sold almost exclusively and at a higher relative price
to the upper echelons of Chinese society.

It could also focus on intellectual property concerns which are acting as a
catalyst for overhauling the Chinese intellectual property system, court
system, and marketplace.

------
ramshanker
In India, dual SIM support is the best advantage Android has over iPhone. That
holds many people away. People are not letting ONE of their number go away.

~~~
noja
What do they use the second phone number for?

~~~
kharms
(1) It's often cheaper/free to call numbers on the same network.

(2) Business phone/family phone.

Edit: speaking from my experience in Eastern Europe. I assume it's similar in
India.

~~~
marcosdumay
In Brazil that would be 90% about (1) and 10% about (2).

If you run a small business, you'll also want to connect on all networks, so
your clients will have one less reason not to talk to you. (But watsapp has
made this point moot recently.)

------
xiaq
One thing Apple has totally messed up in the Chinese market is localization.
When I read Apple advertisements or texts on macOS or iOS UI, I always feel
it's some foreigners who just learned to speak Chinese, yet trying to use
Chinese in creative ways. They are totally understandable, but just that.

I think this at least partially affects Apple's brand building in China.

------
brentis
Switched to Pixel XL when iPhone 7 came out and killed headphone jack. Last
thing I want on a phone, more things to charge and worry about.

Quality takes may forms. Pixel camera is reviewed to be better and screen is
legit sRGB and it charges in 15min and lasts 1.5 days vs iPhone 7.

I also think iOS is a steaming turd. As an app dev for both platforms, I'm
amazed people don't see the integration Android has with Pixel and others.

Let's see them "innovate" no home button in iPhone 8 along with a curved
screen.

For the record this is being typed on my iPad...

------
siproprio
If the situation in China is similar to the situation in Brazil, then it is
not a surprise Apple products aren't successful there. Apple services here are
very poorly supported and localized, and Apple products are too expensive
compared to the relative benefit we would receive.

Why would you purchase a significantly more expensive device, with worse
features, that sometimes don't work at all?

We still haven't gotten turn by turn directions in Apple Maps, for example.

~~~
btian
But you can install Google Maps or Waze on an iPhone.

I like my iPhone because it's the fastest phone in the market. Pixel costs the
same, and Galaxy S8 costs more than iPhone.

~~~
siproprio
You're comparing the prices of only 2 android phones, when there are a lot
more models available. None of these two phones are very popular in my country
or in China.

The most popular devices here are mid-end Android phones, like the Moto G
series phones.

Furthermore, what is supposed to differentiate Apple is its software, because
hardware is a commodity.

Being "the fastest" doesn't appeal much to costumers as compared to price, and
to the default software experience.

~~~
btian
Yeah I guess it makes sense for people who are not rich.

Mid-end phones don't appeal to me at all.

------
dangerous_words
The blog post completely misses the near total influence of the Chinese
government. Yes, China is a different ecosystem and that has second order
effects. But it's still important to get the direction of causality right.

In nearly every country around the world, Android phones are dependent on and
dominated by the Google ecosystem. They aren't in China. Why? Because Google
services are banned. So is Facebook. So are some of Apple's services. Even
back when Google was cooperating with the PRC and trying hard for the local
market, executives rightly or wrongly claimed that whenever their marketshare
passed 30% regulators turned nasty.

Many, many foreign companies have poured resources into China and the few that
have succeeded have generally done so on the strength of a global brand—such
as Coke, LV or Apple. That doesn't mean that Apple's challenges in China are
simply due to market forces though. China's decision to ban _all K-pop,
K-dramas and other Korean media_ over their recent missile defense system
shows that much.

Simply put, WeChat violated multiple rules on Apple's App Store on its way up
that have enabled it to act like the platform it does today. In any other
country Apple would have simply refused to push non-compliant updates, but in
China Apple faced the risk of being barred from the market entirely. Years
later, WeChat is now so dominant that Apple would have to capitulate for
market reasons alone.

> _" WeChat is that, but it is also for reading news, for hailing taxis, for
> paying for lunch (try and pay with cash for lunch, and you’ll look like a
> luddite)"_

That's just not true. Most lunches in China are not bought via WeChat. Even
inside the 2nd ring road in Beijing, cash is very common.

------
staticelf
> None of that lock-in exists in China: Apple may be a de facto monopolist for
> most of the world, but in China the company is simply another smartphone
> vendor, and being simply another smartphone vendor is a hazardous place to
> be.

Don't get that part. I live in Europe and sure a lot of people has an iPhone
but I believe strongly that more people have an Android.

Doesn't Android have like 80% or more of the world market?

[http://www.idc.com/promo/smartphone-market-
share/os](http://www.idc.com/promo/smartphone-market-share/os)

~~~
Devid2014
"Apple may be a de facto monopolist for most of the world"

May this is how some peoples from USA see Apple ?

But here in EU Apple is just another smartphone vendor and most peoples are
using Android.

~~~
johncolanduoni
AFAICT they're not a monopoly here either; most of the numbers I see are in
the neighborhood of 40%.

~~~
dragonwriter
Monopoly isn't defined by marketshare in some descriptive category, it's
defined by market (pricing) power. If you have that's you have a monopoly
(which makes sense, because that means that even if there are participants in
the same descriptive category, you empirically _are not competing with them_
for sales.)

------
yabatopia
I don't know if most people really consider the OS to be that important
anymore, as the author strongly believes. The Windows Surface Laptop is no
threat to Apple because it doesn't run macOS. Samsung's smartphones are no
threat to Apple because the phones don't run iOS.

Then he continues with the WeChat factor to explain the shrinking market share
of Apple in China. If you consider China the trendsetter in tech, that doesn't
bode well for Apple in the rest of the world. It's a clear example that an OS
isn't that important anymore.

If, or better when, a platform similar to WeChat emerges in Europe or the US,
Apple can't rely anymore on it's OS to sell high margin hardware like the
iPhone or Mac. It's not just a China problem.

~~~
rm_-rf_slash
Are you kidding? It's like every other day we hear about a new Android exploit
or security flaw. At least Apple is committed to strong encryption and
privacy. The OS - and the hardware integration - is an enormous selling point
to me. As much as I oppose Apple's direction as of late for many business
decisions (iPhone 7 headphone jack for example), the reasons stated above are
why I still cannot see myself switching.

~~~
awjr
Android enables you to install apps from 3rd party stores and specifically
warns people about being careful about doing this. It is not so much that
Android has more exploits, but that it is more exploitable if you choose it to
be.

------
vanilla_nut
>Unsurprisingly, in stark contrast to the rest of the world, according to a
report earlier this year only 50% of iPhone users who bought another phone in
2016 stayed with Apple:

At first, I was confused by this graphic. Then I realized that the author is
dramatically misinterpreting it: the graphic actually means that 66.85% of
phones purchased in 2015 were made by Apple and 50% of phones purchased in
2016 were made by Apple. So we actually have literally no information about
Apple's customer retention in China from that graphic at all. (Unless I'm
really reading it wrong?)

I wish journalism majors were required to take a stats class in college.
Sigh...

~~~
valuearb
Somehow you didn't notice the graph added up to 250%, and you snark that the
author needs to brush up on statistics?

Please explain how 50 of 250 is actually 50% of everything. Especially when
the author writes iPhone sales are only 9.6% of the chinese market.

~~~
vanilla_nut
Good point. I guess I should have gotten a little more sleep last night...

So I guess these ARE customer retention rates? Following his link brings me
here:
[https://mp.weixin.qq.com/s?__biz=MjM5ODEyOTAyMA==&mid=266190...](https://mp.weixin.qq.com/s?__biz=MjM5ODEyOTAyMA==&mid=2661906770&idx=2&sn=73662bbef300beda9237d30adaf374fa&chksm=bd92a5418ae52c57eb1c238a34b9f8a6418993d3384ec331758b4ae102351a4e04d2ed878336&mpshare=1&scene=1&srcid=0504Q1KjS8LTXMPois1oL3yP&key=c84baf55e7d27452d7d25e8d4216f3083fd387d19f1c1a67737c24d1dd9b45dae04bc0e728d03eada93643c901672625aa3e51158cc3bfff1934908b5c0229bee273701f7cf7b5d3c55a6dfefacb6747&ascene=0&uin=MTY1ODQwOTc0MA%3D%3D&devicetype=iMac+MacBookAir6%2C2+OSX+OSX+10.11.6+build\(15G1421\)&version=12020610&nettype=WIFI&fontScale=100&pass_ticket=txq8pNJOZPQCgr2USCGKoo4Q6ywoGnIyfwIIr0PTnlFp6hwHmmCF%2FvRWzEnCnVY2)
(god, what a ridiculously lengthy URL). Looks like Apple only captured 33 and
25% of the market each year, respectively- not 66 and 50%, as I thought
before. In which case I think the author should at least mention the fact that
Apple's picking up a lot of their competitor's customers YoY as well- that's
hardly a bad thing. Maybe the Chinese market simply has less brand loyalty.

------
tormeh
So WeChat did what Java couldn't do: Build an abstraction that made OS
irrelevant client side. I guess you could say that the browser has done this
too, but not fully, I guess.

~~~
jordanlev
The browser absolutely did this -- just compare the importance and dominance
of MS Windows in the late 90's / early 00's to today.

------
chmaynard
_In China, the most important layer of the mobile software stack is WeChat,
not the operating system._

If true, then the next "killer app" is already here. Connie Chan's 2015
article lays out a very convincing case for this claim
([http://a16z.com/2015/08/06/wechat-china-mobile-
first/](http://a16z.com/2015/08/06/wechat-china-mobile-first/)). WeChat, or
something like it, will soon spread to other markets. Surely, Apple executives
understand this and are busy working on an Apple equivalent.

------
thogenhaven
The most interesting part of this article is how big incumbent companies fail.
Not by direct competition, but by a new product category/service that makes
the current one a pure or irrelevant commodity.

------
ericjang
Meta question: is there a "Hacker News of China" forum where I can find this
article discussed from the Chinese perspective?

~~~
LiweiZ
Try zhihu.com. Though I don't think the quality is anywhere close to here.

------
sangnoir
The author's explanation for Apple's "China problem" is unconvincing to say
the least:

> [...]behind local Chinese brands like Oppo, Huawei and Vivo. All of those
> companies sold high-end phones of their own; the issue isn’t that Apple was
> too expensive, it’s that the iPhone 6S and 7 were simply too boring.

 _Boring_ \- that's the explanation for a significant dip in sales? I would
have expected a list of exciting design or features that Oppo, Huawei and Vivo
are putting into their phones to steal customers from Apple, because
historically their flagships have been equally 'boring'.

The "China Problem" is at the crux of the matter (title of the post), and the
explanation is too hand-wavy for my taste. My default attitude to tech
industry analysts is cynicism; I do wonder who exactly pays for such
superficial analyses and what value do they get from them?

~~~
draw_down
The idea is pretty clear, I think. Apple's problem is WeChat. It's more
important than the phone OS, which is different to most other countries. The
effect of WeChat combined with China's sheer size is a problem for the iPhone
business.

~~~
sangnoir
WeChat is available on iPhones _and_ its competitors. Since it is a common
factor, WeChat alone cannot explain the decline in iPhone sales.

------
EGreg
What's the situation in China with WeChat's competitors?

Why can't WeChat copy any product in a week, if FB does?

------
ganfortran
Don't forget that China has biggest and most competitive smartphone market in
the world, both in specs and price. iPhone is kinda underwhelming in the past
year.

~~~
iplaw
Too bad the phones from ZTE, Huawei, OnePlus, Xiaomi, etc generally suffer
from horrendous build quality. From my experience, even their flagship devices
feel more like a toy and less like an actual phone. The iPhone and Galaxy, and
perhaps a few one offs from other companies, set build quality and craft
benchmarks.

~~~
awjr
I've been very impressed with the OnePlus 3T. Cannot fault it at the price
(£400).

~~~
gideonparanoid
£400? I got mine for £330 last year (was £300 before GBP tanked).

------
dilemma
The real problem for Apple in China is that their brand simply isn't as strong
as it is in the US. It has nothing to do with WeChat.

~~~
xiaq
I agree with the first part, but the article has a point on WeChat. It is a
very good example of how app vendors have stronger brands while smartphones
are seen as commodities in China.

~~~
dilemma
No, the article contradicts itself and makes an incorrect claim. First, it
says that iPhones are bought as statement pieces, ie their hardware. Then, it
says iPhones aren't as popular in China because Androids can use WeChat too.
These are incompatible claims.

~~~
ctvo
They are not incompatible claims.

People buy things for multiple reasons. The point of the article is Apple has
a problem, one of the reasons, iOS, isn't applicable in China due to WeChat
being the dominate platform (and works on all devices).

The author circles back to mention that it doesn't mean Apple is eliminated
from that market since they still have other differentiators (status symbol).

------
shmerl
_> Unsurprisingly, in stark contrast to the rest of the world, according to a
report earlier this year only 50% of iPhone users who bought another phone in
2016 stayed with Apple_

Interesting. This shows that Apple don't compete properly and only achieve
high sales through monopoly. That probably explains their general nasty
attitude to many things, and really sick lock-in mentality.

 _> None of that lock-in exists in China: Apple may be a de facto monopolist
for most of the world, but in China the company is simply another smartphone
vendor, and being simply another smartphone vendor is a hazardous place to be.
To be clear, it’s not all bad_

Why is it bad? Being "simply another smartphone vendor" is the right
situation. What's bad are monopolistic markets.

------
anjc
> hardware differentiated by software such that said hardware can be sold with
> a margin much greater than nominal competitors running a commodity operating
> system.

Apple's hardware is not differentiated by software. Their creaking software is
an ancillary requirement to use their excellent hardware. If their software
was their differentiator then Hackintosh's would be more widely used.
Secondly, OSX _is_ a commodity operating system. Non-commodity operating
systems would be things like VOS.

> The functionality is mostly the same, and if users value a sustainable
> advantage in the user experience Apple deserves the profits — and power —
> that follow.

Sorry to be a dickhead but you shouldn't throw terms like "sustainable
advantage" around like they're literal terms, when they have a very precise
meaning in literature and research going back nearly half a century. Sustained
Advantage specifically relates to Corporate Strategy and industry competition
and is completely unrelated to user experience and whether or not a company
"deserves" profits; advantage in an industry implies value accrual regardless
of whether it's deserved or not. Nice UX might arise from functional level
strategies, which arise from business level strategies, but otherwise they're
unrelated concepts and it's not something the user should be aware of.

Misuse of terms leads to them being confusing and meaningless (e.g.
Disruption).

~~~
ForrestN
While you may find it creaking, myself and many other people find the
experience of using Apple software far better than any competing systems. I
wouldn't work somewhere that asked me to use Windows. For me, and maybe I'm
overly aesthetically sensitive, it would make my day to day life much worse.
This is just to say that the authority with which you dismiss Apple's software
as a point of differentiation is probably misplaced.

~~~
anjc
Differentiation also has a precise meaning in literature, and just feeling
that software which comes free with Apple hardware is better than other
software doesn't indicate product differentiation or a differentiation
strategy. That's just personal preference.

I'm not saying that you don't/shouldn't genuinely and rightly prefer Apple
software, I use Apple devices every day myself. That being said, I'd hazard a
guess that you wouldn't use OSX on a Dell as your primary machine? Or iOS on a
cheap Android if that were possible?

~~~
valuearb
Yea, you don't understand the definition of product differentiation or
differentiation strategy, because iOS and MacOS are poster children for both.

You also don't understand that MacOS isn't designed to be a commodity OS that
runs on any hardware. It doesn't install with a huge database of video drivers
for every possible PC out there. Running MacOS on generic hardware is
problematic and not worthwhile, especially when the vast majority of Mac users
can get good Mac hardware for less than a fraction of 1% of their billable
rate.

~~~
anjc
Yeah, I understand exactly what the definitions of them are in detail, and
somebody saying "It's differentiated because I like it better", which is what
the person I replied to wrote, doesn't fit under the definitions.

I never said that attributes of Apple's product lines can't be classed as
'differentiated'.

