Xiaomi, Vivo and Oppo: the challengers leading China’s charge against Apple

Xiaomi sold 70 million phones in 2015. Photograph: Pichi Chuang/Reuters

The idea that one of America's most talismanic businesses – and the world's biggest company by market value – might one day come to rely on China for its growth would have seemed strange just a decade ago. But for iPhone maker Apple, what happens on the other side of the world is suddenly crucial to its future.

Speaking to analysts last week as the company released its fourth-quarter earnings, chief executive Tim Cook couldn't assuage concerns. While proclaiming the "best results ever" in greater China, with revenues up 14% to more than $18bn, he also admitted that "we began to see some signs of economic softness [there] earlier this month, most notably in Hong Kong." The shares, already down from $130 last May to $100, clattered down another few dollars.

Cook emphasised that he remained "confident about the long-term potential of the China market". There again, on previous occasions Cook has been equally confident about the long-term future of the iPad – and its sales have now fallen for eight quarters in row.

Now Apple faces three key challenges in the Chinese market, the world's largest for smartphones: the economic headwinds and falling share prices cutting into consumer spending and confidence; the saturated market; and the intensifying competition from far cheaper homegrown rivals.

China's phone market, which accounted for a third of all smartphone sales worldwide in 2015, is already slowing as the number of first-time phone buyers declines and people delay replacement purchases. A year ago, phones were being replaced on average after just 13 months; now that period is lengthening. According to Woody Oh, an analyst at research group Strategy Analytics, total Chinese smartphone sales in October-December actually fell by 4%, to 118m; Apple sold 15.5m phones there, up from 13.5m a year before, while its worldwide sales remained flat at 74.4m.

But that was only enough to make Apple the third-biggest supplier behind local firms Huawei (pronounced "Hoo-wah-way") and Xiaomi ("she-yow-mee"), which each sold nearly 18m units. And just behind Apple were two more local rivals, Vivo and Oppo.

All of the rivals offer much cheaper products, running Android software (without Google's services inside China; with them outside) and they have seen scorching growth in 2015.

Huawei principally builds telecoms network equipment, but has been solidly expanding its handset business. Almost half of the 108m it turned out in 2015 were exported. Xiaomi had aimed for 100m in total, but slow first-half sales cut that to 70m for the year, of which 90% were sold in China. Oppo, meanwhile, has grown by 67% in the year, shifting 50m units worldwide.

Shops advertising the iPhone 6S in Shenzhen. Photograph: Bobby Yip/Reuters

The absence of Samsung, the world's most prolific smartphone maker, from China's top five may seem surprising. But it has been hurt more than Apple by low-cost rivals in the past two years; Xiaomi pushed it from the top spot in 2014, and the local competition has eaten away at its sales.

Now, though, those rivals are trying to take a bigger bite out of Apple. But they are coming up against the power of its brand – which, so far, remains highly aspirational in China.

Unlike phone makers using Google's Android, Apple – which writes its own iOS software – remains able to command premium pricing, and more.

The dollar's strength means that in China an entry-level iPhone 6S that in the US costs $649 is priced at the equivalent of $833. And this in a country where the mean income is 56,339 yuan – about £6,000 or $8,500. The cheapest iPhone thus costs more than a month's wages; in the west, that used to be the measure of how much to spend on a diamond engagement ring.

Yet it is a price people have been willing to pay, specifically because it is expensive. The FT's Jonathan Margolis recalled last week how "when I used a nice Android [phone] in the company of a friend in Shanghai, she advised me that I looked 'like a poor man from the country'." For urban dwellers, having an iPhone, or a phone easily mistaken for an iPhone, is still a status symbol.

In addition, Apple has better distribution than smaller rivals through deals with China Mobile, the world's largest telecoms player, and the two other networks. "Apple has worked hard to extend its retailer coverage across China, while Apple Music and other localised services have refreshed the iOS ecosystem for Chinese consumers," notes Oh.

Neil Shah at Counterpoint Research, another analysis firm, says that Xiaomi has had great success attracting first-time customers in the under-$150 segment, where it competes with local rivals such as Lenovo. But at the upgrade stage it loses customers, who shift to Huawei, Oppo – and Apple. "Almost half of the iPhones that we sold in China last quarter were to people who were buying their first iPhone," Cook told analysts – suggesting about 7m successes in getting people to lay out money.

However that willingness to buy Apple's product will be sorely tested this year as China's economy struggles.

Cook's revenue guidance already implies a fall in sales against the year before. Having pushed Samsung aside, local rivals will be looking to complete a clean sweep of the bestselling phones this time next year.

Samsung has fallen out of the list of China's top five smartphone suppliers Photograph: Edgar Su/Reuters

RISING STARS

Huawei A Chinese company that also makes telecoms networking equipment, it sold 108m smartphones in 2015. Best known for its founder's links to the Red Army – which has meant its network gear has been banned from the US over spying suspicions. In the UK, however, BT uses Huawei equipment extensively.

ZTE Like Huawei, a Chinese company that also makes network equipment, but for which handsets are increasingly important: it grew 36% in 2015, to more than 60m handsets, aiming for the low-end market. But it doesn't publish financial data, so profit or loss is unknown.

Lava Indigenous to India, Lava is one of the fastest-growing companies in the newest fast-growth market, now that China has slowed to a crawl. Like all its rivals, it uses Google's Android, but unusually has Intel chips powering the phones. This year it aims to expand into Mexico.

Oppo The Chinese smartphone brand shipped 50m handsets in 2015, up 67%, to rank among the world's top 10. It competes with Xiaomi on price, but has had more success abroad in India, Pakistan, Sri Lanka and Australia.

FALLING STARS

HTC The Taiwanese company made the first Android phone, and was once the US's largest Android supplier. But it shrank 17% in 2015 and has made losses for three quarters in a row. With no services business, it is being crushed by the competition.

Lenovo/Motorola Lenovo is the world's biggest PC maker, and bought American mobile-phone pioneer Motorola in 2014, but has been unable to bring it to profit. It is also losing out in the fiercely competitive Chinese market to Huawei and Xiaomi, seeing sales fall and losses mount.

Microsoft/Nokia Microsoft bought the rump of Nokia's phone business in September 2013, but has seen sales droop and been unable to find profitability. Sales shrank nearly 30% in 2015, according to Counterpoint.

Sony Though it makes camera sensors for everyone including Apple and Samsung, Sony's phone business has lost more than $1bn in the past two years, and sales peaked in 2014. Management has wondered about a sale, even while scaling down to cut losses.

LG Korean rival to Samsung in almost every consumer electronics business, its premium phones are well-regarded by critics yet have sold poorly, leaving sales flat and profits elusive.

Source: Xiaomi, Vivo and Oppo: the challengers leading China's charge against Apple