The New Testament’s Book of Revelation speaks of the Four Horsemen of the Apocalypse — commonly depicted as war, famine, conquest, and death. Now, let me say up front that I don’t believe Apple’s business is in any danger of actually dying — not when you consider that only five months ago it became the first company in world history to achieve a $1 trillion market valuation. This means it was more valuable than the entire gross domestic products of all but the 15 largest nations in the world.
But war, famine, and conquest? Oh yes, Apple is facing a triumvirate of tribulations of late. Most are centered in China, and all have a common root. Let’s take them one at a time.
The Red Horse of War
In the latest skirmish in Apple’s two-year-long-running patent war with chipmaker Qualcomm, a Chinese court ordered Apple to stop selling its older iPhone 6, 7, and 8 models in China after it deemed the company had violated two of Qualcomm’s patents. One patent related to photo editing, and the other involved managing applications on a touch screen.
Apple has been battered by more than two dozen patent infringement suits filed by Qualcomm embroiled in recent years. Apple in turn has accused the San Diego-based chipmaker of using its market dominance to unreasonably raise prices, and the latter has not exactly emerged from these battles unscathed. A 2014 decision by Chinese regulators forced Qualcomm to reduce some the royalty rates it charges for its chips.
This patent war poses serious risks for Apple, which depends upon China for some $53 billion in iPhone sales, or one fifth of its total worldwide revenue. This latest ruling could jeopardize about $12 billion iPhone sales in China — no small amount.
The uncertainties this patent war poses to Apple’s business in China are only amplified by the months-long high-risk trade war between the U.S. and China. The Trump administration has imposed tariffs on more than $200 billion in Chinese goods, alleging unfair trade practices and intellectual property theft. In retaliation, China has imposed tariffs on U.S. goods.
So far the iPhone has been exempted from the U.S.-China trade dispute, which has primarily affected steel and a range of additional products like robots, electric cars, and soybeans. But there is no guarantee that iPhones won’t be added to the list of products subject to tariffs or other penalties, which would further jeopardize Apple’s revenue and profits.
Indeed, if President Trump decides to impose tariffs on smartphones, Apple would be particularly hard hit, given its almost complete dependence on factories in mainland China. Global archrival Samsung, on the other hand, maintains phone production facilities in a variety of countries and would be less harmed if the trade war directly affected smartphones.
In any event, trade tensions continue to grow between the U.S. and China, despite a temporary truce signed between President Trump and Chinese President Xi Jinping in Buenos Aires December 1. Canada’s recent detention on an American warrant of the chief financial officer of Chinese smartphone maker Huawei has spiked fears of Chinese retaliation. Perhaps Apple’s Mr. Cook ought not visit China for a little while.
The Black Horse of Famine
As if a bitter patent war combined with trade war weren’t enough for Apple to deal with, the company also faces a seriously slumping Chinese economy that is eating away at its profits. Two weeks ago, these Chinese economic ills forced Apple for the first time in 16 years to reduce its revenue expectations by 5 percent as a result of slowing iPhone sales in that country.
The New York Times quoted Mark Zandi, chief economist at Moody’s Analytics, observing that, “Apple is a bellwether. The iPhone is something that everyone knows and buys, and if people aren’t buying it, then that’s a pretty good sign they’re having a hard time.”
Added Apple CEO Tim Cook in a letter to investors: “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in greater China. We believe the economic environment in China has been further impacted by rising trade tensions with the United States.”
Apple’s reduced revenue forecasts for China sent its shares tumbling more than 7 percent, eviscerating an astonishing 36 percent of its market value from $1 trillion to $700 billion. This just shows you the power of investor expectations — an expected drop of $3 billion or so in Chinese iPhone sales led to an investor-driven loss in Apple’s market value one hundred times greater.
The White Horse of Conquest
While Apple global sales of iPhones were flat in the third quarter, the same was decidedly not true of its Chinese smartphone competitors. Huawei’s global smartphone sales, for example, were 33 percent higher than the same period a year earlier, which enabled it to supplant Apple as the world’s second largest smartphone maker, after Samsung. Sales are also booming for the other major Chinese smartphone brands Xiaomi, Oppo and Vivo.
Xiaomi, for example, came out of nowhere to become the No. 1 seller of smartphones in the huge Indian market and the fourth-largest vendor in Europe, according to market research firm Canalys.
Part of it is price, of course: a Xiaomi phone sells for roughly half the price of an equivalent iPhone. But it’s not only about price. Chinese smartphone makers have made improvements in features and overall quality that sometimes top those of similarly-featured iPhones.
According to The Wall Street Journal, “In China, local brands have been faster than Apple to introduce new features on their smartphones, often for a lower price. That was the case for the dual-SIM feature and in-screen fingerprint sensors.”
In addition, Apple is only now planning to introduce double- and triple-rear cameras on its high-end phones, which have multiple lenses that offer better pictures.
Now we come to the common root of Apple’s Three Horsemen apocalyptic trials. Underlying the company’s patent battles (war), economic slump (famine), and loss of market share (conquest) is a common thread. Apple needs to do three not-so-simple things:
1] Step up its innovation game.
2] Get its product mojo going again.
3] Beef up its intellectual property position.
To be fair, when it comes to item No. 3, Apple’s troubles in the patent realm are not solely of its own making. The Chinese patent application and examination process has been streamlined, and the patent system overall has been strengthened greatly in that country. Chinese companies today file for more patents than American companies do, and the world’s top two biggest patent filers are no longer American but Chinese companies — ZTE and Huawei.
Meanwhile, the American patent system has been weakening. The U.S. used to rank first among nations in the strength of its intellectual property rights. But according to the Chamber of Commerce’s latest Global IP Index, the U.S. has now fallen to 12th place, tied with Italy.
Italy. Really?
As for Apple, there’s no denying that the company faces challenges today from hungrier Chinese players who are no longer content with either low-end phones or the Chinese market alone.
Still, anyone who believes Apple is going to succumb to that Pale Horse of Death has really not been paying attention -- most especially to Apple’s extraordinary ability to continually reinvent itself.
