Tim Cook needs to do this to vote Apple's rejection – The Motley Fool

Apple (NASDAQ: AAPL) fell a bomb on January 2 when it slashed its December quarter guidance due to weaker than expected iPhone sales.

The letter to investors, signed by CEO tim cook, is due to weak iPhone sales in major China. Cook believes that China's weak economic growth and trade tensions with the US led to a decline in retail sales in the region. But a closer look at developments in the Chinese smartphone market indicates that Apple is also blaming it.

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Apple's "premium" bubble burst

China's economy rose 6.8% in the first quarter of 201[ads1]8, but growth declined to 6.5% in the third quarter. It was in line with the country's official 2018 growth goals.

However, despite this economic downturn, the transfers of smartphones made by Chinese OEM manufacturers (original equipment manufacturers) increased. Vivo, OPPO and Huawei then jump 14%, 7.5% and 6.6% respectively in their shipments in the third quarter of 2018 compared to the second quarter.

However, Apple saw a 10% drop in shipments over the same period. Clearly, the iPhone manufacturer loses its market share in China to local OEMs, which not only capitalizes on the increased preference for home-made products in the light of the trading tensions with the United States, but also comes up with innovative devices at competitive prices.

Huawei has driven Apple as the second largest smartphone company globally thanks to its strategy of offering feature-rich premium phones at lower price points over Apple's range.

It makes sense to conclude that Apple's strategy to increase iPhone prices has declined, and the company has priced itself out of this market.

It's not just a China problem

In fact, Apple's problems are deeper than just the Chinese market, which is the company's third largest source of revenue, with 18% of the total top line. Cook has admitted that the upgrade cycle of new iPhones in some developed markets has slowed down.

In India, recent reports show that iPhone sales in the country fell 50% in 2018 to just 1.6 million to 1.7 million units. It's a strong contrast from 2017, when the company's shipments in this lucrative smartphone market had doubled.

Cook cannot apologize for slowing economic growth as the reason for this poor performance in India, because the Indian government expects the economy to grow to 7.2% in the financial year ending March, up from 6.7% growth clocked in the previous fiscal year.

Sales trends in this market clearly indicate that consumers prefer cheaper but powerful phones from such as OnePlus, which sent 500,000 units in India during the quarter 2018 per counterpoint research. Apple, on the other hand, sent 400,000 units in the same quarter.

All in all, Apple's strategy to increase iPhone prices is back, and therefore it may be time for Cook to become more flexible with pricing.

The Possible Solution

It would be out of character for Apple to reduce iPhone prices at a time when the company is looking to offset the device, with lower average sales prices (ASP). But that's probably what the company needs to do if it wants to increase its user base and increase sales of additional services.

There is evidence to suggest the same thing. Apple's sales in price-conscious India had increased in the fiscal year 2017 when the company began producing older models in the country. Models like the iPhone SE and iPhone 6S were in strong demand thanks to reduced pricing, and significantly increased Apple's sales in this market.

But Apple failed to deliver in India now, as customers have woken up to the fact that it might be a better idea to buy a new generation phone from one of the Chinese vendors rather than throwing money out for an elderly Apple device that costs almost the same amount.

So Apple must also lower prices to defend its market share or it must come with well-priced and well-equipped units that can compete effectively. Some may argue that such a strategy would charge a company's margins, but then weak iPhone sales mean Apple may find it difficult to maintain the impressive growth of service.

All in all, Tim Cook needs to bring new users into the iPhone ecosystem, which means the devices become more accessible to users in both new and developed markets. At the same time, the company must ensure that current users do not move instead of upgrading to another iPhone.

If Cook does not take corrective steps fast enough, Apple's sales will continue in the wrong direction.