The iPhone drops to fifth most popular smartphone in China

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Apple's iPhone has dropped to fifth place in Chinese smartphone shipments, according to a report by Counterpoint Research cited by Bloomberg.

The iPhone made up 11% of devices sold in May 2016, down from 12% during the same period last year. This is bad news for Apple, which counts on China as its most important market outside of the US. During Q1 2016, iPhone sales in China accounted for almost 25% of all iPhone devices sold globally.

This is just the latest in a string of news about Apple's increasing troubles in China.Nevertheless, there are three reasons China remains a promising market for Apple's future revenue growth:

Apple is well positioned in Greater China. For all of fiscal 2015, Apple generated $58 billion in revenue from Greater China. This is more than any other business in China, according to Apple CEO Tim Cook.

The number of users switching from Android to Apple is growing. The number of iPhone users in China who had last used an Android smartphone rose 40% between September 2015 and March 2016.

China's middle class is growing at an incredible rate. There were 50 million people in China's middle class in 2011. This is expected to increase to half a billion by 2021. The middle class is an important segment for smartphone manufacturers, particularly Apple, which markets itself as a luxury or aspirational brand in China.

Still, there are a number of hurdles Apple will need to overcome in the Chinese market.

Smartphone growth is slowing, while local vendors are releasing increasingly popular phones. In 2015, smartphone growth in China grew just 1.8% year-over-year (YoY), according to the IDC. That's a massive slowdown from 2014, when smartphone shipments grew 20% YoY. Meanwhile, local vendors are becoming more popular, with Huawei, Vivo, Oppo, and Xiaomi taking out the top four vendor positions, respectively, according to Counterpoint Research. Huawei, in particular, has increased its lead of the overall market, making up more than 17% of shipments in China.      

The Chinese government is issuing increasingly strict regulations on app stores.Recently, the Cyber Administration of China released new rules that will hold app stores accountable for the commercial viability of app publishers. In turn, publishers will need to authenticate users' identities with real-name registration. The new regulations will apply to all app stores that operate in China, including Apple's App Store.

Apple appears to have fallen out of favor with the Chinese government. In the past, Apple avoided the regulatory wrath of the Chinese government. However, this year alone, Apple has had two of its services shut down, and has become embroiled in a legal dispute with a small domestic smartphone vendor over the violation of its smartphone patent. Cook has been working hard at rekindling the company's relationship with the Chinese government: He's met with China's vice premier Liu Yandong in May, and Apple invested $1 billion in Chinese Uber-like car service Didi Chuxing.  

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Source: The iPhone drops to fifth most popular smartphone in China