Apple's Sales in China Are Healthy, but Can They Be Sustained?


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China Watch: Top Business News From the World's Second Largest Economy

Apple ( AAPL ) reported its quarterly financial results this week and among the chief concerns was slowing growth in China, the world's largest market for computers and mobile devices.

During the fiscal second quarter, Apple sales in China jumped 11% to a record $8.8 billion. However, the growth rate was significantly lower than the 67% rate of growth achieved in the previous quarter.

A large part of the slowdown can be attributed to the maturation of the high-end smartphone market, which Apple dominates. In China, the new mobile growth arena is in middle- and lower-end smartphones, where local firms like Lenovo ( LNVGY ), Huawei (SHE:002502), and ZTE (SHE:000063) hope to dominate.

Apple, meanwhile, has to weigh whether or not it should introduce a less expensive iPhone for China, which would allow it to capture at least some of that burgeoning lower-end growth, but which could also potentially cheapen its brand.

An Apple store in Shanghai

Apple CEO Tim Cook was optimistic about continued growth in China. Speaking on an earnings call, he said that Apple will double the number of retail sales points in the mainland in the next two years. He also added the low-cost iPhone 4 was a hit in China.

"We've seen significant interest in iPhone 4 there, and we recently made it even more affordable to make it even more attractive to first-time buyers," said Cook, according to Apple Insider .

Of course, Apple still has one more major untapped source of Chinese growth: a deal with China's largest carrier, China Mobile ( CHL ), which would allow Apple to access the carrier's more than 700 million subscribers. Most analysts expect the two companies to reach a carriage deal by the end of this year.

"Going forward we still see a significant opportunity in China," said Cook. "It's a great market."

Here is the week's other business news from China:

Is Huawei Giving Up on the US Market?

Earlier in the week, it was reported that Chinese networking and telecommunications equipment giant Huawei Technologies, a fierce rival of Cisco ( CSCO ) had decided to abandon its plans to conquer conquer the US market.

"We are not interested in the US market any more," Eric Xu, the company's executive vice president, was quoted as saying at Huawei's annual analyst summit on Tuesday. Huawei has faced a tough time in the US, with its ventures having been repeated blocked by the US government over fears that the company, alleged to have close ties with the Chinese government, is a threat to national security.

However, on Thursday, Huawei quickly doused such reports, with company spokesperson Scott Sykes saying: "Mr. Xu's statement reflects the realities of our carrier network business in the US. The growth of Huawei's carrier network business is primarily from developed markets in other parts of the world. Considering the situation our company currently faces in the US, it would be very difficult for the US market to become a primary revenue source or a key growth area for our carrier network business in the foreseeable future. In spite of this challenge, our US employees remain committed to providing quality services for our customers."

In an interview with Forbes , another source close to Huawei added that Huawei still has plans to enter the US market, but that it was focused more on growing other markets like Europe and Asia.

"Without a doubt they will continue to do business in America, but Huawei's main markets are in Asia and Europe, amongst others. In fact, the Asia-Pacific Region and Europe accounts for about 60% of Huawei's annual revenue mix in 2012, and those regions achieved healthy growth in 2012."

China Sales Drag Down Yum Earnings

As expected, sales of Yum Brands' ( YUM ) restaurants plunged in the first three months of 2013, due to the lingering effects of a food safety scare in China from late last year. Yum reported better-than-expected first-quarter earnings this week, with net income falling to $337 million, or $0.72 per share, from $458 million, or $0.96 per share, a year ago.

Same-store sales in China fell 20% in the first quarter, with a 24% decline in KFC thanks to the food safety scare and a 2% decline at Pizza Hut. With the new avian flu outbreak in China, Yum also warned that sales in China would take time to recover. The company still plans to open 700 new restaurants in the mainland, however.

"Historically, the sales impact of Avian flu publicity has initially been dramatic at KFC, but relatively short-lived," said YUM CEO David Novak in a statement.

Luxury Brands Falling Out of Favor in China?

The economic slowdown in China is hitting luxury brands hard. French group PPR (PPRUF), which owns brands like Gucci, Saint Laurent, and Bottega Veneta, said that growth in China so far this year has been slower compared with last year.

"In China, there is less enthusiasm to buy luxury goods, perhaps because of concern over the economic situation and the political environment," said PPR chief financial officer Jean-Marc Duplaix in a call this week.

In the first quarter, sales of Gucci, the second-biggest luxury brand after LVMH's Louis Vuitton (LVMUY), rose almost 10% in China, an impressive figure -- except when compared with the 15% rate of growth notched a year ago.

"We do not see any signs of a pick-up in China," Duplaix added. "We're still waiting for a rebound in consumption in China. Perhaps it will be more in the second half."

According to the South China Morning Post , luxury watchmakers have also confirmed that they've experienced a sales slowdown in China.

One high-end fashion house that is bucking the trend is Burberry (BURBY). The Wall Street Journal reported that Burberry's top market in the last two quarters was China.

Twitter: @sterlingwong

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
More Headlines for: AAPL , CHL , CSCO , LNVGY , YUM

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