India replaces China for Apple’s growth engine

Its growth rate in India has jumped by 51%.

In a development that has soothed the ruffled feathers of industry analysts, Apple has reported that it has sold more iPhones than Wall Street had estimated thus enabling its revenues to top many analysts’ top targets and annulling fears that one of the company’s top products had hit a wall.

During the third quarter, Apple sold 40.4 million iPhones. Although this is certainly a lot of phones it is still down by 15% from a comparative quarter from a year ago. However, its chart bursting sales beat the average analysts’ forecast of 40.02 million, as per FactSet StreeAccount, a market research firm.

Earlier, the demand for iPhones had waned in China partly due to the worsening economic conditions there. As for more matured markets, with people tending to hold on to their phones for a longer period of time, the sale of iPhones retracted. This trend had stroked fears whether Apple can continue to innovate and lead, as Wall Street had come to expect of it.

“China was a major letdown. Samsung and Huawei are much more competitive now than a year ago and the Chinese economy is not doing well at all,” said Patrick Moorhead, an analyst with Moor Insights & Strategy.

He however went on to say that the bump in its service revenues, mainly from sales in its iCloud service and App Stores was a “very big bright spot for Apple.”

According to Luca Maestri, Apple’s CFO, despite being weighed down by a tough foreign exchange scenario and comparisons with the sales chart of iPhone 6, from the previous year, Apple’s performance topped his expectations.

He went on to add, Apple had reduced its channel inventory by $3.6 billion, thus exceeding the expected reduction of $2 billion, which only goes to underline that sales were better than their appearance. Demand from customers “was better than what is implied in our results and better than we had anticipated,” said Maestri.

Incidentally, the sales of the iPhone drives around 2/3 of Apple’s total sales. According to Tim Cook, the iPhone SE’s sales was bring more customers to Apple since it extended the product’s price range.

“It’s opening the door to customers we weren’t reaching before,” said Cook.

Despite all of this good news, China remains a concern for Apple, since it was touted as its growth engine for the coming years. Sales there have dropped by 33.1% this year which Maestri attributed to the drop in inventories as the nation was experiencing a general downturn in its economy and was facing strong headwinds.

“It is very clear that there are some signs of economic slowdown in China, and we will have to work through them,” said Maestri.

Apple’s other services, including, iCloud, Apple, App Store and others generated almost $6 billion in revenue and was up by 18.9% from the previous year.

Faced with a diminishing return on its smartphone front, Apple is increasingly focusing on wringing out more revenues from existing users from its host of services. For the first time, its services business has eclipsed the revenues from its gadget division, including Mac and iPad and has emerged as its second biggest source of revenue after the iPhone.

As per Maestri, this emerging trend bodes well for the company since Apple’s gross margins on its services are better than the industry’s average.

“It’s a great business because it is recurring in nature and more linked to our installed base,” said Maestri.

Significantly, India has emerged as a rare bright spot in its dimming iPhone sales chart, with the region providing Apple a 51% growth from iPhone sales.

“India is now one of our fastest growing markets … We’re looking forward to opening more retail stores in India down the road, and we see huge potential,” said Cook to analysts.

Categories: Entrepreneurship, HR & Organization, Strategy


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