As expected, Apple once again delivered a phenomenal quarterly result in Q3 FY17. The company managed to break the seemingly never ending decline of iPad sales and also posted healthy profit and revenue growth on a Year-on-Year basis. Revenue grew by 7 percent Y-o-Y and Apple’s services business is now the size of a Fortune 100 company. Apple’s share rose in extended trading, and there was optimism in the air. However, there was as dark lining to this silver cloud – and it came to the fore during the analyst call when Tim Cook was asked as to why Apple had removed VPNs from its Chinese App Store.
Rocking the US, rocky in India and China
Apple’s removal of VPNs from the Chinese App Store underscores a broader issue that has been plaguing the Cupertino giant in emerging countries. The company is not able to progress as fast as it could there because of regulatory reasons and various other factors. The US market had reached saturation point in terms of smartphone penetration quite some time ago, and Apple is without any doubt, the number one smartphone company in terms of market share (and value) in the US. Now, the Chinese market is also on the verge of saturation, but Apple’s market share here has decreased steadily leaving it at a rather humble number five position. The Indian smartphone market is far from saturation point, but in spite of that, Apple still does not feature among the top five smartphone manufacturers in India.
Apple can significantly improve its position in India and China. But this is not as easy as it sounds – there are quite a few hurdles facing the company, and these vary from being regulatory to being financial in nature.
Tackling the Great Digital Wall of China
When it comes to China, the number one issue that’s affecting Apple is the Government’s toughening stance on enforcing censorship in the country. The Chinese government, through its Great Fire Wall apparatus, has been making sure that the country’s Internet acts more like an intranet whereby citizens within China have access to only those specific parts of the Internet which the Government deems fit for them to use and see. This puts Apple in a tricky position. Recently, Apple had to comply with a request from the Chinese government whereby it had to remove quite a lot of VPNs from the Chinese App Store.
VPNs are crucial in helping people access sites that are banned in China such as Facebook, Twitter, and others. Apart from that, VPNs are also critical in protecting a person’s privacy on the Internet. By removing VPNs, Apple has put the privacy of millions of iPhone users in China at stake. This would not have been a problem if Apple were a Chinese company, but Apple is a US company that truly believes in privacy as a fundamental right. To the extent that Apple last year denied FBI access to the content of a terrorist’s iPhone 5C on the grounds of privacy protection. Apple’s varying stands on privacy depending on the geography where it operates has provoked many a debate, especially on social media. Whether this is right or not is a topic for another day.
But it’s not just the VPNs that Apple has had to remove. It has had to compromise on its own ecosystem a little as well. For example, last year, Apple decided to close its books and movies services in China – once again to comply with China’s censorship rules. Considering how Apple has been pushing the services narrative to its investors, not being able to sell books and movies in one of its largest markets is going to hamstring its monetization.
It’s not just censorship, but tensions are beginning to appear in Apple’s relationship with China’s big tech companies as well. Tencent, which is the maker of the popular WeChat app in China, has a famous tipping feature in the app where users could tip creators for their content such as articles, music, etc. The tip is directly passed onto the creator. However, Apple views this tipping feature as an in-app purchase and wants a 30 percent cut of it as well. Tencent, however, is not willing to view this as an in-app purchase and feels that Apple’s cut is totally unwarranted. It is quite likely that Tencent will have its way and might as well broker a lower in-app purchase cut.
Apple is also being asked to build a data center in China for storing data of mainland users. Last year, Apple in what seemed a bizarre move, went on to invest as much as USD 1 billion in the Chinese ride hailing giant Didi-Chuxing. Most view the investment as a move through which Apple wants to remain in the good books of the Chinese government.
The discovery of India…is still on
The state of affairs in India is also odd. Tim Cook, in his latest earnings call, once again reiterated how India is an important market for Apple. However, the company is finding it difficult to get meaningful traction in India. It is still a very small part of the overall smartphone market here, with almost half the sales of its iPhones coming from the relatively low-priced and soon to be outdated iPhone 5S.
In order to have a higher profile, Apple decided to build Apple showrooms in India on par with its international ones. However, the single brand retailing norms in India require a company to source a certain amount of raw materials in India, and as the iPhone sources none of its raw materials domestically, Apple had to apply for an exemption stating that the iPhone is a technologically advanced product. It is unclear whether or not Apple has received an exemption and varying reports in media provide no clear picture on when or if Apple would start full-fledged Apple stores in India.
Apple also wanted to import second-hand iPhones in India and sell them at a cheaper rate. In my opinion, this would have helped the company tremendously in gaining market share. iPhone’s top of the line hardware coupled with regular software updates means that second-hand iPhones are usable for quite some time after they are bought. However, the Government cited an anti-dumping policy which prevented the import of second-hand iPhones in India. Indian manufacturers also fully knew the threat a second hand or refurbished iPhone would pose and were quick to lobby against it using their organizational body, the ICA. The net result: the company is not making the sort of progress it would like in another of the world’s largest smartphone markets.
It might be bossing the US smartphone market, but as growth there slows down, Apple is finding the going tough in markets like China and India, thanks to a variety of issues, none of which ironically has to do with product quality. Just how well it tackles them – will it make special edition phones for China, or more affordable ones for India – could well determine whether it can sustain its insanely great growth.