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Why the Apple Inc. iPhone X Isn't Doing as Well as Hoped in China

Ashraf Eassa, The Motley Fool

Respected analyst Ming-Chi Kuo with KGI Securities recently revised down his Apple (NASDAQ: AAPL) iPhone X shipment estimates. Kuo had originally expected Apple to ship around 80 million iPhone X smartphones during the current product cycle, but now he expects Apple to sell only 62 million units in that time -- a reduction of 18 million units.

If we assume a 50/50 split between the model with 64GB of storage and the one with 256GB of storage, the average revenue that Apple sees per iPhone X is $1,074. A shipment reduction of 18 million units should mean a revenue reduction of nearly $20 billion during the product cycle -- hardly chump change!

The rear-facing camera on the Apple iPhone X.

Image source: Apple.

This weakness, per Kuo, is due to the iPhone X selling worse than expected in China, which seems to contradict recent reports of the iPhone X's success in the region. Kuo gives two reasons for the lower-than-expected iPhone X sales in the region that investors should pay close attention to. 

1. Longer upgrade cycles

The first reason, Kuo says, is that smartphone upgrade cycles in China have simply gotten longer. Apparently, in the fourth quarter of 2017, smartphone owners in China were willing to wait between 24 and 26 months to upgrade their devices -- a 10-month increase from the year-ago quarter. 

If customers are willing to hang on to their existing devices longer, then over a given period of time, they're going to buy fewer smartphones. This leads to lower demand for smartphones overall and, unfortunately for Apple, an iPhone X is still just a smartphone (albeit a really nice one).

2. The notch (and the price)

The iPhone X has a screen that takes up virtually the entire front of the phone. The only exception is the cutout at the top of the display that make room for the front-facing camera and other sensor technologies. Some call this cutout a "notch." 

Here's MacRumors' paraphrasing of Kuo's note (emphasis mine): 

The second big factor is said to be Chinese consumers' penchant for larger displays. According to Kuo, the notched design on the iPhone X isn't yet compatible with many popular Chinese apps, leading many customers to see it as offering less usable screen space than 5.5-inch iPhone Plus models. This confusion, coupled with the high price of iPhone X, is thought to have undercut replacement demand. 

The bad news (at least for Apple) is that Kuo's reasoning around the notch makes sense: As long as apps aren't properly tuned to work on an iPhone X (or an iPhone X-style screen), then the usable screen area will, indeed, be lower on the iPhone X than on, say, the iPhone 8 Plus. 

The good news is that the iPhone X is still popular enough that serious app developers will almost certainly update their apps to take advantage of an iPhone X-style display over the coming year, making the "notch" less of an issue in Apple's upcoming product cycle.

Additionally, since the price of the iPhone X appears to be an issue, things should get better on that front in the coming product cycle as well. The direct successor to the iPhone X is expected to be priced lower than the current model, and Apple is also reportedly preparing an even cheaper iPhone X-style device with a cheaper liquid crystal display (LCD) instead of a more expensive organic light emitting diode (OLED) display like the ones that the higher-end iPhones will use. 

Indeed, Kuo said he thinks that Apple is poised to gain market share in China in the coming product cycle once it releases new iPhones later this year. I can't help but agree. 

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.