Will IPhone SE Halt The Decline In IPhone Sales?

  • Apple recently introduced its next generation low-cost iPhone, the iPhone SE.
  • With the iPhone SE and iPhone 7, Apple challenges Xiaomi in the high and low-end segments.
  • The new iPhone will assist Apple to halt the declining sales of the iPhone product line.

In a big event in Cupertino, CA, Apple (NASDAQ:AAPL) recently introduced the long-awaited, low-cost 4’’ iPhone called the iPhone SE, a new iPad Pro, and a new price point for the Apple Watch. The new smaller iPad Pro is another attempt by Apple to revive the iPad category and stop the declining sales while the new Watch price point is targeted to accelerate the growth of Apple’s new smart watch category that, so far, has failed to generate strong sales. However, the most significant announcement of that event was the iPhone SE launch that is expected to help Apple fight the expected decline in iPhone sales.

With an A9 processor, 4’’ retina display, 12-mega pixel camera with 4K support, touch ID, and full-LTE support, the iPhone SE is not an ordinary low-cost phone, but it has the interior of an iPhone 6S wrapped in an iPhone 5S design at an attractive price point. In the U.S., the new iPhone SE will be sold at an incredibly attractive price of $399, compared with the $649 price point of the iPhone 6S. Additionally, with a two-year plan, consumers could get the iPhone SE for free with most carriers. Amid the intensifying competition in the smartphone market, the new price point could help Apple to fight back against the upcoming Android-based vendors that offer solid phones at attractive prices, like Xiaomi, HTC, Meizu, LG, etc.

Even though the new iPhone has a very attractive offering in the U.S. market, Apple’s real target market for the new phone is mainland China, which accounts for 24% of the company’s revenues. As shown in the chart below, Apple is the third largest smartphone vendor in China, with a 13.4% market share, behind Huawei, which controls 14.5% of the market, and Xiaomi, which shipped the most phones in 2015 in China and controlled 15% of the market. Although Apple is only the third largest vendor in China, it gained that market share with high-cost iPhones. For example, the iPhone 6S costs $800 in China while Xiaomi’s latest model, the Mi5, costs only $305.

AAPL_chart 12_032816

For Apple, Xiaomi is a difficult hurdle to pass in China. The local vendor tries to offer the Apple experience to its customers with a clean design line, sleek branded shops, and large Apple-like events, but at better, lower prices. The new iPhone is targeted to challenge this exact segment of the Chinese market of consumers, which finds the Apple eco-system appealing but has avoided Apple devices because of the high prices. The iPhone SE is expected to be sold at around $500 in China, which is $200 more than the Mi5 but $300 lower than the iPhone 6S. This way, Apple keeps its image of a semi-luxury brand that many aspire to own by not lowering its prices too much to erode the brand’s strength.

As shown in the chart above, Xiaomi has been rapidly growing since 2011, and it has dominated the Chinese market for a few years. Apple’s launch of the iPhone SE tries to challenge Xiaomi’s dominance by offering a device to the low-cost segment of the market that does not fall behind regarding tech specs and is competitive in price terms. This is the first phase of challenging the Xiaomi, and the iPhone 7, which will be introduced later this year, will challenge Xiaomi at a higher price point. Chinese consumers have already demonstrated their appeal for high-cost phones, so it is reasonable to assume that Apple will be able to sell both of the new iPhone models this year in China (iPhone SE and iPhone 7).

The iPhone SE is expected to decrease the iPhone’s ASP in China; however, the volume is expected to rise as we see from preliminary numbers of iPhone SE pre-orders that reportedly crossed 3.4M units in China. The new 4'' iPhone brings a real dilemma to Chinese consumers whether they prefer a large screen phone or an affordable Apple branded phone. Will this move trigger a rebound in iPhone product line revenues or readjust estimations? I doubt it, but I believe it will marginally improve Apple's revenues and earnings results for the third quarter (end June 2016), halt the declining sales from the iPhone segment and moderate the quarter-over-quarter fluctuations the sales decline would have caused.

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