A perfect storm for Apple’s downward outlook, experts say

Tim Cook said he expects revenue to fall more than $7bn short of estimates

Customers browse inside the Apple store in Beijing, China - one of the biggest markets of Cupertino firm. Bloomberg

Apple, which revised its revenue outlook downwards for the first time in nearly two decades on Wednesday, cited economic slowdown in China, one of its biggest markets, and weaker demand for its newer products - and a challenging year is still ahead after a perfect storm of setbacks, analysts say.

Chief executive Tim Cook said the company expects revenues of $84 billion in the first quarter of 2019, ended December 29, more than $7bn short of earlier estimates.

The challenges Apple is facing are fundamentally not about its recent downbeat financial filings, but about the rise of politics in business, Sam Blatteis, chief executive of The Mena Catalysts, which advises technology companies on policy and government affairs in the region, told The National.

The greater China market has contributed more than 18 per cent in Apple’s overall revenues in the last four quarters. Now, a weaker Chinese economy, slowed by the ongoing US-China trade war, is stymieing Apple's bottom line.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Mr Cook wrote in a letter that was sent to investors.

China's domestic market continues to be challenged as overall consumer spending around smartphones has been down, noted Massachusetts-based International Data Corporation (IDC).

“High penetration levels, mixed with some challenging economic times, has slowed the world's largest smartphone market (China),” said Ryan Reith, programme vice president for IDC's mobile device trackers.

Despite negative sentiments, it is expected that the Chinese smartphone market will recover in 2019.

But Abbas Ali, managing editor of TechRadar Middle East, says the trade war is not Apple's only foe. Rising competition from China's Huawei is also to blame.

"Apple pointed to weaker demand in China but Huawei grew considerably in that time period [in China]. It's not that the Chinese buyers aren't buying phones - they're just buying fewer iPhones," Mr Ali told The National.

This could be due to the high cost of the iPhone or negative sentiment in China towards American products because of the trade war, said Mr Ali, adding that judging one quarter's performance shouldn't be the basis for judging the future of Apple.

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The weaker demand for iPhones, which contributed nearly 60 per cent in company’s revenues, was hinted at earlier by Apple during the last earnings call in November last year when it announced it would stop disclosing the number of units sold for the iPhone.

Chinese tech giant Huawei, which is catering to both low- and high-income customers, dethroned Apple from the second spot in smartphone shipments in the Middle East and Africa in the second quarter of 2018, according to the GFK May 2018 report.

Worldwide, South Korean company Samsung retains the biggest global market share of smartphones at 18.9 per cent, according to US researcher firm Gartner. Samsung is followed by Huawei and Apple with 13.4 and 11.8 per cent, respectively.

There were also other factors looming that ultimately contributed to the bleak outlook for Apple's holiday quarter.

Its latest iPhone models were released in different quarters in 2017 and 2018. In 2017, it launched the new iPhone X in November - just in time for the holiday season - while the iPhone XS of 2018 was launched in September, leaving a portion of sales for the fourth quarter and pinching holiday performance.

Apple’s battery replacement programme and optimisations in iOS 12 also made older iPhones noticeably faster – preventing people from upgrading in the past couple of months, said Mr Ali.

The price of Apple’s flagship iPhone is significantly higher now than it was two years ago - up by as much $600. It’s likely that people will hold onto their $1000 or $1500 phone longer than they would have kept a phone that costs much less, said Mr Ali.

With mounting competition from the likes of Samsung, which is launching the Galaxy S10 in February, and Huawei poised to retain its second spot in terms of market share, 2019 may not prove any easier.