APPLE IN CHINA REPORTMATTHEW BRENNAN & SAMIN SHA

CHINACHANNEL.CO

MATTHEW BRENNAN

SPEAKER, AUTHOR, HOST, CO-FOUNDER OF CHINA CHANNEL

MATTHEW IS A WELL-KNOWN SPEAKER AND WRITER ON THE TOPICS OF WECHAT AND THE CHINA DIGITAL

ECOSYSTEM. REGULARLY QUOTED IN INTERNATIONAL MEDIA (THE ECONOMIST, BLOOMBERG, FORBES, THE

FINANCIAL TIMES, BBC, TECHINASIA), HIS COMPANY ORGANIZES CHINA’S LARGEST WECHAT MARKETING

CONFERENCE SERIES FOR INTERNATIONAL COMPANIES. MATTHEW’S COMPANY CHINA CHANNEL IS A CHINA

FOCUSED TECH CONSULTANCY AND RESEARCH FIRM. HE HOLDS 13+ YEARS ON THE GROUND

ENTREPRENEURIAL EXPERIENCE IN MAINLAND CHINA. CO-HOST OF THE CHINA TECH TALK PODCAST

PRODUCED TOGETHER WITH TECHNODE, CHINA'S LARGEST ENGLISH LANGUAGE TECH MEDIA. HIS BOOK

‘BUILDING YOUR BUSINESS THROUGH WECHAT’ IS DUE FOR RELEASE LATER THIS YEAR.

EMAIL: MATTBRENNAN@CHINACHANNEL.CO

LINKEDIN: HTTPS://CN.LINKEDIN.COM/IN/MATTHEW-BRENNAN

PARTS OF THIS REPORT WERE FIRST DELIVERED AT THE

DHL APAC REGIONAL CONFERENCE SHANGHAI IN MAY 2017

CHINACHANNEL.CO

“WE CONTINUE TO BE VERY

ENTHUSIASTIC ABOUT OUR

OPPORTUNITY IN CHINA.”

TIM COOK

MAY 2017

CHINACHANNEL.CO

WE FEEL RATHER LESS ENTHUSIASTIC…

WE DIDN’T FIND MUCH TO BE ENTHUSIASTIC ABOUT…

CHINACHANNEL.CO

OUR 3 CORE ARGUMENTS BACKED BY THE BEST PUBLICLY AVAILABLE

STATISTICS AND DATA WE COULD FIND.

1. APPLE’S SERVICES ECOSYSTEM IN CHINA IS VERY WEAK

AND IN MANY KEY AREAS NON EXISTENT.

2. THE PERCEPTION OF APPLE’S BRAND AMONGST CHINESE

CONSUMERS HAS CHANGED FOR THE WORSE.

3. CHINESE SMARTPHONE BRANDS ARE RAPIDLY GAINING IN

STRENGTH, SOHISTICATION AND LOCAL MARKET SHARE.

CHINACHANNEL.CO

PART 1

APPLE’S CHINA

SERVICES ECOSYSTEM

CHINACHANNEL.CO

“THE FUTURE OF THIS

COMPANY IS GOING TO BE IN

SERVICES.”

TIM COOK

CHINACHANNEL.CO

18.5

21.2

25.5

10.2%

14.6%

19.7%

2014 2015 2016

SERVICES REVENUE IN BILLION USD GROWTH

DATA: APPLE INC.

SERVICES IS APPLE’S ONLY SECTOR WITH CONSISTENT & STEADY

GROWTH. SERVICES PLAY A KEY ROLE IN LOCKING IN USERS

CHINACHANNEL.CO

TO MANY AMERICAN IPHONE USERS IT

WOULD BE UNTHINKABLE TO CHANGE

THEIR IPHONE TO AN ANDROID DEVICE.

THEY ARE LOCKED IN TO APPLE SERVICES.

CHINACHANNEL.CO

TO MOST CHINESE IPHONE USERS

THE IPHONE IS JUST A LUXURY PHONE.

THEY HAVE NO SIGNIFICANT INVESTMENT

IN APPLE’S SERVICES ECOSYSTEM

APPLE’S CHINA SERVICE ECOSYSTEM HAS BEEN

SYSTEMATICALLY STRIPPED AWAY BY LOCAL COMPETITORS

CHINACHANNEL.CO

IBOOKS / ITUNES

CHINACHANNEL.CO

CHINACHANNEL.CO

FROM APRIL 2016 IBOOKS AND ITUNES STORE HAVE BEEN BLOCKED IN CHINA.

CHINESE AUTHORITIES ORDERED THEM TO BE TAKEN OFFLINE.

CHINACHANNEL.CO

“THOSE 2 STORES* FOR THE

MONTHS THAT WE HAD

THEM OPERATIONAL, WHICH

WAS SEVERAL MONTHS,

THE REVENUE WAS LESS

THAN $1 MILLION.”

TIM COOK, JULY 2016

*CHINA IBOOKS & CHINA ITUNES

CHINACHANNEL.CODATA: SOOTOO RESEARCH INSTITUTE

*IBOOKS WAS FULLY OPERATED IN 15Q4 AND 16Q1

CHINA DIGITAL READING MARKET DURING THE

2 QUARTERS* WHILE IBOOKS WAS IN OPERATION

0%

5%

10%

15%

20%

25%

30%

35%

IREADER QQ TIANYI TADU MIGU DUOKAN AIYUEDU QIDIAN PANDA

2015 Q4 2016 Q1

IBOOKS WAS AVAILABLE IN CHINA

FOR APPROXIMATELY HALF A YEAR.

IT MADE VIRTUALLY NO IMPACT ON

THE CHINESE MARKET.

CHINACHANNEL.CO

DATA: IRESEARCH

* ITUNES MOVIE WAS SHUT DOWN IN LATE APR 2016

A SIMILAR STORY IN VIDEO.

APPLE MADE LITTLE IMPACT.

IQIYI

42.3%

TENCENT

VIDEO

19.33%

YOUKU

18.10%

OTHERS

20.25%

ONLINE VIDEO

MARKET SHARE

BY USAGE TIME,

APR 2016

ICLOUD

CHINACHANNEL.CO

CHINACHANNEL.CO

$18

$10

$3$0.8FREE

FREE

ICLOUD USAGE IS LOW. PRICING IS OUT

OF LINE WITH LOCAL CHINESE COMPETITORS

ICLOUD

CHINA

PRICING

2T2T1T200G50G5G

APPLE MAPS

CHINACHANNEL.CO

MOBILE MAPS MARKET CHINA Q4 2016

CHINACHANNEL.CODATA:IIMEDIA

AUTONAVI

34.3%

BAIDU MAP

29.90%

TENCENT MAP

13.10%

OTHERS

15%

CHINESE PLAYERS

DOMINATE THE MARKET

WITH OFFERINGS TAILORED

TO LOCAL TASTES.

SOGOU

7.7%

APPLE PAY

CHINACHANNEL.CO

CHINACHANNEL.CO

“I WOULD RATE OUR FIRST-DAY

PERFORMANCE (IN CHINA) AS

1,000, IF THE FULL SCORE IS 100.”

JENNIFER BAILEY, VICE PRESIDENT OF APPLE

PAY, COMMENTING ON APPLE PAY DEBUT IN

CHINA

APPLE PAY LAUNCH FEB 2016

CHINACHANNEL.CO

PARTNERED WITH CHINA UNIONPAY, CHINA’S SOLE DEBIT CARD NETWORK WITH

OVER 6 BILLION CARDS AND ACCEPTED ACROSS ALL MAJOR STORES AND

MALLS IN CHINA.

BACKED BY 19 MAJOR CHINESE BANKS, INCLUDING THE BIG FOUR.

3 MILLION CONSUMERS LINKED THEIR BANK CARDS TO APPLE PAY IN THE

FIRST 2 DAYS, ACCORDING TO CHINA MERCHANTS BANK.

* CHINA BANK CARD INDUSTRY

DEVELOPMENT REPORT (2017)

APPLE HAD AMPLE REASONS

TO BE OPTIMISTIC

+

Data Source: 36Kr Q1 2017

0%

22%

67%

11%

PAYMENT

METHODS IN

CONVENIENCE

STORES: BEIJING

ZHONGGUANCUN

CASH

UNION PAY

CREDIT+DEBIT

CARDS

APPLE PAY

ALIPAY +

WECHAT

PAY QR

CODE

PAYMENTS

CHINACHANNEL.CO

A YEAR LATER…

DATA SOURCE: 36KR Q1 2017

67%

17%

16%

SOLID

UNDERSTANDING

ONLY CASHIER

UNDERSTANDS NO

COMPREHENSION

CONVENIENCE

STORE STAFF

UNDERSTANDING OF

APPLE PAY

CHINACHANNEL.CO

PRIMARY PAYMENT METHODS

FOR OFFLINE PURCHASES

CHINACHANNEL.CO

94.1%

38.6%

29.0%

13.0%

93.6%

41.3%

30.9%

11.4%

89.4%

49.5%

33.0%

9.6%

87.6%

51.3%

35.7%

9.8%

MOBILE PAYMENT APPS (E.G.

WECHAT PAY)

CASH DEBIT & CREDIT CARDS SMARTPHONE BUILT-IN

PAYMENT TOOL (E.G. APPLE

PAY)

DATA: TENCENT PENGUIN

INTELLIGENCE SURVEY PLATFORM

1ST TIER CITIES (BEIJING, SHANGHAI)

2ND TIER CITIES

3RD TIER CITIES

4TH TIER CITIES & BELOW

APPLE PAY CLEARLY

STRUGGLING

CHINACHANNEL.CO DATA: ANALYSYS

CHINESE MOBILE PAYMENT MARKET SHARE Q4 2016

ALIPAY

54.1%TENPAY

37.02%

SMALL PLAYERS

7.85%

OTHERS

INCLUDING

APPLE PAY

1.03%

IMESSAGE

CHINACHANNEL.CO

CHINACHANNEL.CO

1. NON CROSS PLATFORM: CHINA MARKET DOMINATED BY

ANDROID DEVICES

2. EASY TO BE SPAMMED: BLACK MARKET IN SELLING

PHONE NUMBERS A SERIOUS ISSUE IN CHINA

3. USER HABITS: LOT OF USERS CONFUSE IMESSAGE WITH

SMS

OH, AND 1 MORE THING…

REASONS WHY IMESSAGE IS HARDLY USED IN CHINA

TIME SPENT ON MOBILE IN CHINA

DATA SOURCE: QUESTMOBILE, TRUSTDATA

AND HILLHOUSE ESTIMATES

45%35%

10%

EVERYTHING

ELSE

10%

TENCENT OTHER

CHINACHANNEL.CO

WECHAT IS

ESTIMATED TO

ACCOUNT FOR

OVER 1/3 OF ALL

TIME ON MOBILE!

50%OF USERS SPEND

90 MINUTES PER DAY IN WECHAT

SOURCE: WECHAT TEAM

TIME SPENT IN WECHAT 2015 VS. 2016

DATA: QUEST MOBILE (DEC 2016)CHINACHANNEL.CO

6.5%

13.9%

22.4%20.9%

14.4%16.3%

3.4%

7.5%

14.2%

21.0%

18.1%

33.9%

< 10 MIN 10~30 MIN 30 MIN~1 HOUR 1-2 HOURS 2-4 HOURS 4 HOURS+

2015

2016

4HRS+ MORE

THAN DOUBLED

APPLE MUSIC

CHINACHANNEL.CO

CHINACHANNEL.CO

“(APPLE MUSIC) LATE TO THE

(CHINA) MARKET WITH AN

INFERIOR PRODUCT THAT IS

OVERPRICED”

ROBERT LYONS, VISITING LECTURER AT

NORTHEASTERN UNIVERSITY IN BOSTON,

APR 2017

TOP MUSIC APPS IN CHINA, MAR 2017MILLIONS OF MONTHLY ACTIVE USERS

CHINACHANNEL.CO

DATA: QUESTMOBILE

* MONTHLY ACTIVE USERS

228.95211.43

107.72

62.79

14.4 14.34 11.15 7.29

APPLE MUSIC DOESN’T

MAKE THE LIST

TOP 3 ALL OWNED

BY TENCENT

APP STORE

CHINACHANNEL.CO

THE APP STORE IS APPLE’S

ONLY BRIGHT SPOT IN SERVICES

CHINESE APPLE USERS HAVE

NO CHOICE BUT TO USE IT

REVENUE FROM CHINA’S

APP STORE IS INCREASING FAST

CHINACHANNEL.CO DATA: APPLE

GLOBAL APP STORE REVENUE

YEAR OVER YEAR GROWTH

CHINACHANNEL.CO DATA: APPLE

29%

24% 25%27%

35%37%

43% 43%40%

2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1

“APP STORE MOMENTUM IS

TERRIFIC, WITH REVENUE

GROWING 40% YEAR OVER YEAR TO

AN ALL-TIME QUARTERLY RECORD.”

TIM COOK, MAY 2017

CHINACHANNEL.CO

“STRONG PURCHASING POWER AND CULTURAL

FACTORS WILL HELP CHINA ACCOUNT FOR A

STAGGERING 41% OF MOBILE APP STORE

CONSUMER SPEND (BOTH IOS AND ANDROID)

BY 2021.”

APP ANNIE, MARKET FORCAST, 2016-2021

CHINACHANNEL.CO

DATA: APPLE & APP ANNIE

*2021 ESTIMATES ACROSS ALL MOBILE APP STORES

ALL DATA IS CALENDAR YEAR.

0%

20%

40%

60%

80%

100%

2014 2015 2016 2021E*

ALL OTHER

REGIONS

CHINA

APP STORE REVENUE DERIVED FROM CHINA (%)

GAMES ACCOUNT FOR THE MAJORITY OF

IOS REVENUE ESPECIALLY IN CHINA

CHINACHANNEL.CO DATA: APP ANNIE

75%

95%

0%

25%

50%

75%

100%

WORLDWIDE CHINA

NON-GAMES

GAMES

CHINACHANNEL.CO

DATA: GPC, CNG AND IDC

TENCENT FINANCIAL REPORT

51%41% 47%

49%59% 53%

2014 2015 2016

TENCENT ALL OTHER GAMING COMPANIES

ALMOST HALF OF

CHINESE MOBILE

GAME REVENUE

COMES FROM

TENCENT.

CHINESE MOBILE GAME REVENUE

CHINACHANNEL.CO

“WE HAD EXTREMELY

STRONG SERVICES GROWTH

DURING THE QUARTER

(2017 Q1) IN CHINA.”

TIM COOK, MAY 2017

CHINACHANNEL.CO

TENCENT’S MOBILE GAME

REVENUE GROWTH

1.19 1.39 1.43

1.55

1.8786%

114%

87%

51%

57%

16 Q1 16 Q2 16 Q3 16 Q4 17 Q1

MOBILE GAME REVENUE (IN BILLION USD) YOY GROWTH

HONOR OF KINGS

40 MILLION DAU*

HONOR OF KINGS

50 MILLION DAU*THE FIRST COMPLETE

QUARTER OF ‘HONOR OF

KINGS’ IN OPERATION

DATA: TENCENT

* DAU: DAILY ACTIVE USERS

CHINACHANNEL.CO

Q1 2017 WAS DRIVEN HEAVILY BY THE SMASH HIT TITLE

“HONOR OF KINGS” WITH 50+ MILLION DAILY ACTIVE USERS

CONCLUSION:

APPLE’S CHINA SERVICES ECOSYSTEM IS VERY WEAK WHEN COMPARED WITH

OTHER MAJOR MARKETS. THEY HAVE CONSISTENTLY FAILED TO LOCALIZE THEIR

OFFERINGS TO LOCAL TASTES.

2 SERVICES (ITUNES, IBOOKS) HAVE BEEN OUTRIGHT BLOCKED, MOSTLY LIKELY

DUE TO INABILITY OR UNWILLINGNESS TO MEET LOCAL GOVERNMENT

REQUIREMENTS. THE DATA SHOWS THAT NEITHER OF THESE SERVICES HAD ANY

SIGNIFICANT IMPACT ON THE LOCAL MARKET DURING THEIR TIMES OF

OPERATION.

THE SINGLE BRIGHT SPOT SEEMS TO BE IN APP PURCHASE REVENUE FROM APPS

DOWNLOADED THROUGH THE APP STORE.

IT’S CLEAR THAT A SIGNIFICANT PROPORTION OF APPLE’S STRONG CHINA

SERVICE GROWTH IN 2017 IS BEING DRIVEN BY TENCENT’S MOBILE GAMES SUCH

AS THE SMASH HIT TITLE ‘HONOR OF KINGS’.

CHINACHANNEL.CO

CHINACHANNEL.CO

PART 2

CHINESE PUBLIC OPINION

CHINACHANNEL.CO

KNOCK OUT APPLE!

ARTICLE FROM TECH INDUSTRY INFLUENCER KESO

CHINACHANNEL.CO

“ANDROID DEVICES KEEP GETTING

BETTER AND BETTER, BUT I FEEL

APPLE LITERALLY MAKES NO

PROGRESS. SOONER OR LATER I

BELIEVE ANDROID WILL EXCEED IOS”

CHINESE NETIZENS’ COMMENTS

A TRICKY RELATIONSHIP

2 MILESTONE EVENTS HAD HUGE IMPACT

IN SHIFTING PUBLIC OPINION

WECHAT LAUNCHED MINI PROGRAMSWECHAT FORCED TO SHUT DOWN

A REWARD FEATURE FOR IOS USERS

CHINACHANNEL.CO

IN JAN 2017 WECHAT LAUNCHED ‘MINI PROGRAMS’

A FORM OF LIGHT APPS RUNNING WITHIN WECHAT

WECHAT TEAM ANNOUNCED THE

IDEA A YEAR PREVIOUS UNDER

THE NAME ‘APP ACCOUNTS’.

“APPLE DIDN’T ALLOW US TO CALL THEM APP ACCOUNTS. PERHAPS IT’S A GOOD THING.”

PONY MA, FOUNDER & CEO OF TENCENT

MINI PROGRAMS ARE COMMONLY PERCEIVED

AS A LONG TERM THREAT TO APP STORE

CHINACHANNEL.CO

THE LAUNCH DATE OF MINI PROGRAMS

WAS DELIBERATLY TIMED…

ALLEN ZHANG, THE FATHER OF

WECHAT, POSTED ON WECHAT

RIGHT BEFORE THE LAUNCH OF

MINI PROGRAMS, AS A RESPECT

TO STEVE JOBS AND THE 10TH

ANNIVERSARY OF IPHONE.

CREDIT: JASON NG, YOUKENENG ACADEMY

SHARE WITH DEVELOPERS

APP STORE

SWIFT

DESIGN GUIDELINESAPPROVAL CRITERION

OPERATION GUIDELINES

REVENUESPLIT

SAMEENTRANCE

PROPRIETARYLANGUAGE

SAMECRITERION

APPLE APP DEVELOPER ECOSYSTEM

CREDIT: JASON NG, YOUKENENG ACADEMY

LATER SHARE WITH DEVELOPERS

WECHAT

WELANG

WXML + WXSS

DESIGN GUIDELINESAPPROVAL CRITERION

OPERATION GUIDELINES

REVENUESPLIT

SAMEENTRANCE

PROPRIETARYLANGUAGE

SAMECRITERION

WECHAT MINI PROGRAM DEVELOPER ECOSYSTEM

CHINACHANNEL.CO

USERS CAN TIP CONTENT

CREATORS VIA WECHAT

WALLET WITH NO CHARGE

FROM WECHAT

WECHAT SHUT DOWN ITS REWARD

FEATURE TO IOS USERS IN APR 2017

REWARD AMOUNTS

USUALLY LESS THAN $1

CHINACHANNEL.CO

APPLE DISALLOWED WECHAT TO CONTINUE USING THE FEATURE

THROUGH WECHAT PAY, INSISTING THE REWARD SHOULD GO

THROUGH IN-APP PURCHASE (IAP) WHICH MEANS APPLE WOULD

RECEIVE 30% OF ALL REWARDS.

MASSIVE DISCUSSION FOLLOWED ON CHINESE MEDIA.

CHINACHANNEL.CO

“FOLLOWERS WANT TO TIP

THEIR FAVORED AUTHORS,

NOT APPLE. BUT APPLE

INSISTS TO IMPOSE 30% CUT

VIA IAP* ANYWAY.

THIS IS ROBBERY”

KESO, CHINESE TECH INDUSTRY

INFLUENCER APR 2017

* IAP: IN APP PURCHASE

CHINACHANNEL.CO

AN EASY AND OBVIOUS WORK-AROUND

AFTER WECHAT’S ANNOUNCEMENT TO DISABLE THE REWARD FEATURE FOR

IOS USERS, CONTENT CREATORS SIMPLY SWITCHED TO USING QR CODES TO

GET AROUND PAYING THE 30% TO APPLE.

CHINACHANNEL.CO

CHINESE CONTENT CREATOR’S

INCOME STRUCTURE 2016

ADS

E-COMMERCE

TIPPING

REWARDS

3.80%

OTHER

DATA: IIMEDIA

TIPPING REWARD

MONEY IS SMALL

CHANGE FOR

CHINESE CONTENT

CREATORS.

CHINACHANNEL.CO

APPLE ESSENTIALLY SHOT THEMSELVES IN THE FOOT

1. IT MADE THEM LOOK GREEDY.

2. THEY PISSED OFF THOUSANDS OF INFLUENTIAL

CONTENT CREATORS ACROSS CHINA.

3. THE CONTENT CREATORS EASILY FOUND A WAY TO

AVOID USING IAP.

CHINACHANNEL.CO

RECENTLY, APPLE HAS

STARTED SENDING OUT

WARNING EMAILS TO MANY

CHINESE DEVELOPERS.

THIS SPARKED WIDE

SPECULATION THAT WECHAT

MIGHT BE DELISTED FROM

APP STORE.

THE QUESTION IS:

DID WECHAT TEAM ALSO

RECEIVE THIS WARNING

EMAIL?

THE SITUATION GETS WORSE

CHINACHANNEL.CO

DO YOU WISH WECHAT WOULD DEVELOP

THEIR OWN OPERATING SYSTEM?20K+ RESPONDENTS

SOURCE: KENENGBA OFFICIAL ACCOUNT

ONLINE SURVEY APRIL 2017

YES

52%NO

24%

DON’T

CARE

23%

CHINACHANNEL.COSOURCE: WECHAT INDEX

MENTIONS OF THE PHRASE “WECHAT DELISTED FROM IOS”

HAVE SPIKED RECENTLY ON WECHAT

MAY

26TH

CHINACHANNEL.CO

“THERE’S NO WAY THAT APPLE

COULD TAKE ON WECHAT IN CHINA,

DELISTING WECHAT FROM THE APP

STORE IS EQUAL TO APPLE

KICKING THEMSELVES OUT OF

CHINA. USERS WILL SWITCH TO

ANDROID IN THE BLINK OF AN EYE.”

CHINESE NETIZENS’ COMMENTS

CHINACHANNEL.CO

55%

18%

26%

SOURCE: APP PROGRAM ACCOUNT INDEX

CHINESE IPHONE USERS: WHAT WOULD YOU DO IF

WECHAT WAS DELISTED FROM THE APP STORE?

I'D USE ANOTHER

MESSENGER APP

I'D IMMEDIATELY CHANGE

TO ANDROID

I'D FIND A WAY TO

JAILBREAK MY IPHONE

ONLINE SURVEY

4,000+ RESPONDENTS

CHINACHANNEL.CO

90%

10%

SOURCE: APP PROGRAM ACCOUNT INDEX

CHINESE ANDROID USERS: IF WECHAT WAS

DELISTED FROM THE IPHONE APP STORE…

I'D STILL BE INTERESTED IN

POTENTIALLY PURCHASING AN

IPHONE

THEN I’D BE EVEN LESS LIKELY

TO SWITCH TO IPHONE

ONLINE SURVEY

4,000+ RESPONDENTS

CHINACHANNEL.CO

IF YOU HAD TO CHOOSE BETWEEN WECHAT

AND APPLE, WHICH ONE WOULD GO WITH?500 RESPONDENTS

WECHAT

88%

APPLE

4%

NEITHER

6%

SOURCE: AIZAIGUANGJIE OFFICIAL

ACCOUNT ONLINE SURVEY

CONCLUSION:

APPLE HAS BLUNDERED RECENTLY AND DAMAGED THEIR IMAGE IN CHINA.

THE MOVE TO BLOCK REWARD FEATURES REVEALED THEM TO BE OUT OF

TOUCH WITH THE LOCAL MARKET. APPLE’S OFFICIAL RESPONSES TO

CRITICISM WERE POOR.

CHINESE USERS ARE FAR MORE LOYAL TO LOCAL PRODUCTS SUCH AS

WECHAT THAN APPLE. WECHAT IS CONTINUING TO EXPAND BEYOND

MESSAGING INTO DIRECTIONS THAT IN THE LONG TERM MAY POTENTIALLY

PLACE IT INTO COMPETITION WITH THE APP STORE.

CHINACHANNEL.CO

CHINACHANNEL.CO

PART 3

LOCAL CHINESE SMARTPHONE BRANDS

INCREASING IN STRENGTH, SOHISTICATION AND LOCAL MARKET SHARE

U.S. SMARTPHONE MARKET

SHARE TOP FIVE IN 2017 Q1

CHINACHANNEL.CODATA: COMSCORE MOBILENS

44.5%

28.3%

9.8%

4.2%2.2%

APPLE SAMSUNG LG MOTOROLA HTC

IN U.S. APPLE IS GAINING

MARKET SHARE OVER

ANDROID

CHINA SMARTPHONE MARKET

SHARE TOP FIVE IN 2017 Q1

CHINACHANNEL.CODATA: IDC QUARTERLY

MOBILE PHONE TRACKER

20%

18.2%

14.1%

9.2% 9%

HUAWEI OPPO VIVO APPLE XIOAMI

IN CHINA THE 1ST QUARTER

OF 2017 PRODUCED THE

LOWEST IOS SHARE SINCE

2014.

CHINACHANNEL.CO DATA: KANTAR WORLDPANEL

IPHONE SALES MARKET SHARE

IN CHINA IS SHRINKING FAST

-10%

0%

10%

20%

30%

Q2 2016 Q3 2016 Q4 2016 Q1 2017

PREVIOUS YEAR CURRENT YEAR

-2.2%

-4.8%

-8.0%

-8.7%

CHINACHANNEL.CO

“(CHINESE CUSTOMERS) TIRE

OF LAST YEAR’S, OR EVEN LAST

MONTH’S, MODEL. ONE OF

APPLE’S PROBLEMS IN CHINA IS

ITS PRODUCT REFRESHES… OR

LACK THEREOF.”

BRYAN MA, TECHNOLOGY INDUSTRY

ANALYST AT IDC, AUG 2016

CHINACHANNEL.CO

CHINA IS JAMMED FULL OF LOCAL COMPETITORS

10.80% 11%

7.30%

8.80%

13.60% 9.60%9.20%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016 Q1 17

CHINACHANNEL.CO

TOP 5 SMARTPHONE VENDORS’MARKET SHARE IN CHINA: 2011-2016

DATA: IDC QUARTERLY MOBILE PHONE TRACKER

2012 APPLE LED

THE PACK

10.60%

8.40%9.30% 9.70%

14.60%

16.40%

20.00%

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015 2016 Q1 17

CHINACHANNEL.CO

TOP 5 SMARTPHONE VENDORS’MARKET SHARE IN CHINA: 2011-2016

DATA: IDC QUARTERLY MOBILE PHONE TRACKER

2017 Q1 LOCAL BRANDS

ARE RACING AHEAD

CHINACHANNEL.CO

XIAOMI’S RAPID RISE AND FALL STUNS MANY

0.40%

3%

5.30%

12.40%

15.10%

8.90%

2011 2012 2013 2014 2015 2016

XIAOMI TOPPED THE MARKET

FROM NOWHERE AFTER ONLY

2 YEARS OPERATION THE

XIAOMI MIRACLE BLOOMED.

2016 SAW A SUDDEN DROP

FROM THE TOP SPOT. THE

XIAOMI MIRACLE STALLS IN

JUST 2 YEARS.

LAUNCHING THEIR 1ST

MODEL IN OCT 2011,

XIAOMI WAS NOT A

MAINSTREAM VENDOR

BACK IN 2012-2013.

DATA: IDC QUARTERLY

MOBILE PHONE TRACKER

86 89

70

92

79

85 89

74

86

78 83

87

57

89

74

US UK CHINA GERMANY JAPAN

Q4 2015 Q2 2016 Q4 2016

IPHONE RETENTION RATES (%)

CHINACHANNEL.CODATA: UBS EVIDENCE LAB

RETENTION RATE = BRAND’S USERS UPGRADING THEIR

PHONES WITHOUT CHANGING TO ANOTHER BRAND / TOTAL

NUMBER OF BRAND’S USERS UPGRADING PHONES

CHINA RATES MUCH

LOWER THAN ALL

OTHER REGIONS

67

33

19

30

19

3032

16

10 10

50

36

29 29 28

23 22

1714 14

0

10

20

30

40

50

60

70

80 2016

2015

SMARTPHONE BRAND LOYALTY CHINA MARKETBRAND RETENTION RATE (%)

CHINACHANNEL.CO DATA: TOUTIAO

BIG DROP IN APPLE

LOYALTY LAST YEAR

SIGNIFICANT GAINS

FOR 2 LOCAL BRANDS

RETENTION RATE = BRAND’S USERS UPGRADING THEIR

PHONES WITHOUT CHANGING TO ANOTHER BRAND / TOTAL

NUMBER OF BRAND’S USERS UPGRADING PHONES

HUAWEI IS THE NUMBER 1 BRAND

CHINESE IPHONE USERS DEFECT TO

CHINACHANNEL.CODATA: TENCENT PENGUIN INTELLIGENCE

SURVEY PUBLISHED JUN 2016

14.2%

14.4%

15.1%

17.7%

25%

5

4

3

2

1 HUAWEI

SAMSUNG

XIAOMI

OPPO

VIVO

LOCAL PLAYERS HAVE BIG AMBITION

CHINACHANNEL.CO

“WE HOPE THAT IN 3 YEARS

(2019) OUR MARKET SHARE

CAN BE TOP 2 AND IN 5 YEARS

(2021) OUR MARKET SHARE

CAN BE TOP 1.”

RICHARD YU, HEAD OF HUAWEI CONSUMER

DIVISION, FEB 2016.

MANY HUAWEI PHONES ARE NOT CHEAP!

CHINACHANNEL.CO

HUAWEI MATE 9 PORSCHE DESIGN

TYPICAL CHINA RETAIL PRICE

$1,300 USD (8,999 RMB)

EXCHANGE RATE:

1 CHINESE YUAN = 0.15 DOLLARS

CHINACHANNEL.CO

“PEOPLE LOVE OUR HIGH END

SMARTPHONES, AND WE

CAN’T WAIT TO TAKE ON

DIRECT COMPETITION WITH

APPLE (GLOBALLY)”

RICHARD YU, HEAD OF HUAWEI

CONSUMER DIVISION, NOV 2016

TOP 3 SMARTPHONE VENDORS

GLOBAL MARKET SHARE 2012-2016

CHINACHANNEL.CO

21.2%

14.6%

9.5%

0%

5%

10%

15%

20%

25%

30%

35%

2012 2013 2014 2015 2016

DATA: IDC QUARTERLY

MOBILE PHONE TRACKER

HUAWEI

APPLE

SAMSUNG

LOCAL PLAYERS HAVE BIG AMBITION

CHINACHANNEL.CO

“OPPO IS LARGELY UNKNOWN IN THE

WESTERN WORLD, BUT ITS BRAND IS

WILDLY POPULAR IN CHINA AND

GROWING RAPIDLY ACROSS INDIA.”

NEIL MAWSTON, EXECUTIVE DIRECTOR AT

STRATEGY ANALYTICS

OPPO’S FLAGSHIP MODEL

CHINACHANNEL.CO

OPPO RS9

TYPICAL CHINA RETAIL PRICE

$405 USD (2,799 RMB)

NEVER HEARD OF IT?

CHECK OUT THE NEXT SLIDE…

EXCHANGE RATE:

1 CHINESE YUAN = 0.15 DOLLARS

BEST SELLING PHONE MODELS WORLDWIDE

Q1 2017

CHINACHANNEL.CODATA: STRATEGY ANALYTICS

21.5

17.4

8.9 6.1 5.0

6.1%

4.9%

2.5%

1.7%1.4%

IPHONE 7 IPHONE 7 PLUS OPPO R9S SAMSUNG GALAXY

J3

SAMSUNG GALAXY

J5

UNITS SOLD (MILLIONS)

ABSOLUTE MARKET SHARE (%)

OPPO R9S IS THE NO. 3 BEST

SELLING SMARTPHONE

MODEL GLOBALLY!

WHY ARE OPPO PHONES SO POPULAR?

THE SECRET SAUSE

CHINACHANNEL.CO

CHINACHANNEL.CO

MARKETING SLOGAN

“5 MINUTES CHARGING FOR A

2 HOURS PHONE CALL”

REACHING CONSUMERS’ PAIN POINTS

IN AN EASY TO UNDERSTAND AND

REMEMBER WAY.

A PHONE WITH NO POWER IS A

CHINESE CONSUMER’S WORST

NIGHTMARE.

INTENSE TV AND METRO

ADVERTISING CAMPAIGN.

CHINACHANNEL.CO

IMAGE CREDIT: JIGUO.COM

R9

OPPO MARKETING: THE BEST CAMERA FOR SELFIES. TARGETING YOUNG FEMALES

OPPO R9NORMAL PHONE

OPPO’S COMMISSION SYSTEM INCENTIVIZES BOTH DISTRIBUTORS AND SALES STAFF

TO STAY HIGHLY MOTIVATED, ENHANCING THE IN-STORE EXPERIENCE.

CHINACHANNEL.CO

CHINACHANNEL.CO

OPPO SPENT A FORTUNE TO UPHOLD ITS BRAND. SIGNING UP A-LIST STARS AND

SPONSORING POPULAR TV SHOWS, OPPO IS PERCEIVED AS A PREMIUM BRAND,

ESPECIALLY IN CHINA’S DEVELOPING AREAS.

CHINACHANNEL.CO

OPPO HAS 200,000+ DISTRIBUTION STORES IN CHINA OFFLINE STORES CONTRIBUTE 90%+ SALES

CHINACHANNEL.CO

APPLE OPERATES 40 CHINA APPLE STORES

CHINACHANNEL.CO

“I HONESTLY DON’T THINK APPLE

UNDERSTANDS THE LOCAL

CULTURE ENOUGH TO ACHIEVE

LOCAL PENETRATION (IN CHINA)”

KITTY FOK, MANAGING DIRECTOR OF THE

CHINA GROUP AT IDC, APR 2017

CHINACHANNEL.CO

BEIJING SHENZHEN

SHANGHAI SUZHOU

VERY RECENTLY APPLE HAS REALIZED THE IMPORTANCE

OF LOCALIZATION AND SET UP 4 CHINESE R&D CENTERS IN 2017

IMAGE CREDIT: PIXABAY.COM

CHINACHANNEL.CO

“WE ARE LOOKING FORWARD

TO WORKING WITH MORE

LOCAL PARTNERS AND

ACADEMIC INSTITUTIONS

THROUGH THE EXPANSION OF

R&D CENTERS IN CHINA.”

DAN RICCIO, SENIOR VP OF HARDWARE

ENGINEERING AT APPLE, MAR 2017.

THIS YEAR’S WWDC SAW APPLE INTRODUCE

SOME CHINA LOCALIZATION FEATURES

CHINACHANNEL.CO

CHINACHANNEL.CO

APPENDIX

APPLE OFFICIAL DATA FOR CHINA

APPLE REVENUE GROWTH BY REGION Q1 2017

CHINACHANNEL.CO

20%

11% 10%

5%

-14%

REST OF ASIA

PACIFIC

AMERICAS EUROPE JAPAN GREATER CHINA

DATA: APPLE INC.

28%

1%

70%71%

112%

99%

14%

-26%

-33%-30%

-12%

-14%

CHINACHANNEL.CO

20152014 2016 2017

DATA: APPLE INC. YEAR ON YEAR REVENUE GROWTH

APPLE GLOBAL GROWTH BY REGION

CHINA

ALL OTHER REGIONS

5 CONSECUTIVE

QUARTERLY REVENUE

DECREASES YEAR ON YEAR

DATA: APPLE INC.

APPLE REVENUE BY REGIONQ2 2017

CHINACHANNEL.CO

40%

24%

20%

9%

7%

GREATER

CHINA

AMERICAS

EUROPE

JAPAN

REST OF ASIA PACIFIC

CONCLUSION:

APPLE IS UNQUESTIONABLY DOING VERY WELL GLOBALLY BUT CHINA POSES A TOTALLY

DIFFERENT ENVIRONMENT. CHINESE SEE THE IPHONE AS A LUXURY PHONE RATHER THAN

AN ECOSYSTEM, WHICH MAKES IT MUCH HARDER TO LOCK THEM IN. THIS IS REFLECTED IN

POOR CHINA IPHONE RETENTION RATES.

APPLE’S SERVICES ECOSYSTEM IS WEAK WITH REVENUE GROWTH MOSTLY BEING DRIVEN BY

A 30% CUT FROM IN APP MOBILE GAME PURCHASES THAT ARE DEVELOPED BY LOCAL

PLAYERS SUCH AS TENCENT.

THE PERCEPTION OF APPLE’S BRAND IS SHIFTING, THEY ARE INCREASINGLY BEING

PERCEIVED AS ANTI-INNOVATORS: A COMPANY ABUSING THEIR PRIVILEGED POSITION OF

POWER TO BULLY OTHERS.

LOCAL SMART PHONE BRANDS ARE CLOSING THE GAP THROUGH BETTER AND BETTER

HARDWARE TOGETHER WITH EXCEPTIONALLY STRONG MARKETING AND SALES.

WE CAN STILL FORESEE A SALES SURGE ON THE RELEASE OF THIS YEAR’S HOTLY

ANTICIPATED NEW ANNIVERSARY IPHONE. HOWEVER, IF THIS HARDWARE CENTRIC

BUSINESS PATTERN DOESN’T CHANGE, CONTINUED TURBULENCE IN CHINA FOR APPLE IS A

CERTAINTY. MUCH DEEPER LOCALIZATION OF FEATURES IS A MUST FOR APPLE TO COMPETE.

CHINACHANNEL.CO

SAMIN SHA

SENIOR ANALYST AT CHINA CHANNEL

SAMIN PREVIOUSLY HELD POSITIONS AT HUAWEI

INTERNATIONAL MARKETING AND LATER AT ADWO, ONE OF

CHINA’S LARGEST CHINESE MOBILE AD PLATFORMS. WITH

10+ YEARS OF CHINA INTERNET INDUSTRY EXPERIENCE

SAMIN HEADS UP RESEARCH AT CHINA CHANNEL.

EMAIL: SAMINSHA@CHINACHANNEL.COLINKEDIN: WWW.LINKEDIN.COM/IN/SAMIN-SHA-599653118/

THIS REPORT WAS PREPARED BY CHINA CHANNEL

APPLE IN CHINA REPORTMATTHEW BRENNAN & SAMIN SHA

CHINACHANNEL.CO