WSJ makes the case for optimism on iPhone prospects in challenging Chinese economy

With all eyes on Apple’s earnings report due later today, there is concern that the company will report its first ever year-on-year drop in iPhone sales, with the difficult Chinese economy a significant factor. The WSJ has put together a couple of pieces outlining reasons why Apple’s future in China may be rosier than some anticipate.

The pessimistic view is that most people in China can’t afford iPhones, and that the premium end of the market which can is close to saturation. Couple that to a slowing economy, the argument goes, and you’re not seeing much expansion in the wealthier population in the country.

Tim Cook has for some time been seeking to reassure investors that Apple remains well-placed to succeed in China, and I’ve argued in the past that there is reason to believe him. The WSJ builds on these arguments …

The WSJ notes that the urban upper middle class – Apple’s core market in China – remains forecast to rise from 36M households in 2012 to 193M by 2020. An iPhone is a key status symbol for this demographic, and even when people cannot afford major purchases like a new car, they still buy premium smartphones.

Apple has also been broadening its retail reach in the country, the rapid expansion of Apple Stores mostly taking place outside the so-called Tier 1 cities where the company is already well-established.

The move into smaller cities, said Joseph Foudy, an economics professor at New York University’s Stern School of Business, presents “more virgin territory for Apple and an even greater opportunity for growth.”

Apple has also demonstrated itself willing to adapt to the specific needs of the Chinese market.

Until 2013, it made the iPhone in two colors. Then it added a gold-color iPhone 5S version, because “many Chinese consumers like the color gold,” Mr. Cook told Bloomberg Businessweek last year.

Apple has of course also rolled out gold iPads, MacBooks and Watches.

The piece argues that the company has learned how to navigate the often tricky political environment in China through its earlier issues with things like iPhone warranties – going so far as to offer Chinese customers better terms than those offered in its home market.

Apple agreed to replace faulty iPhones under warranty with new handsets and restart the warranty periods. Apple has no such policy in the U.S.

Using local data centers to avoid storing Chinese customer data in the U.S. was another example cited. In both cases, the claims being made against Apple were baseless, but the company recognized the political importance of responding.

The strong resale value of iPhones is also a significant factor in a country where most Chinese iPhone owners pay the full cost of the phone upfront. Most sell their old iPhones to pay for new ones, and can even do so right outside an Apple store.

Prospective customers were directed to a man sitting on the steps next to the store. His job was to inspect the condition of an old phone offered for trade […] After the inspection, he offered a price for the old phone. If the customer agreed to the price, the customer paid the difference between the cost of the new iPhone and the resale price of the old phone.

Apple’s earnings call will provide a good steer on whether such optimism is justified, not just in the iPhone sales the company will announce today, but on its revenue guidance for the current quarter.

Photo: Reuters/Kim Kyung-Hoon