China discounts, cheaper iPhone to cushion Apple from virus blow to demand

Apple Inc's discounts on the iPhone 11 in China and the release of a new low-price SE model have put the company in a better position than rivals to weather a coronavirus-related plunge in global smartphone demand.

While China, which accounts for roughly 15% of Apple's revenue, appears to be a rare bright spot, investors will be keen to get a picture of global demand when the Cupertino, California-headquartered company reports second-quarter results on Thursday.

The iPhone maker has shut retail stores in the United States and Europe following the COVID-19 outbreak, and China is the only major market where it has been able to reopen all shops.

Consumer spending is expected to be muted as the pandemic has crippled economies and Apple, the world's second-most valuable tech company, is better armed with the launch of its new price-conscious iPhone model, analysts said.

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"Apple is better positioned than most to experience a rapid recovery in a post COVID world," Evercore analyst Amit Daryanani said in a research note. "We see demand as pushed out, not canceled."

He added that the launch of the $399 iPhone SE suggested that Apple's supply chain was getting back on its feet after weeks of shutdown earlier this year.

Analysts expect Apple to report a 6% drop in revenue and an 11% fall in net income in its fiscal second quarter, according to Refinitiv data.

On the other hand, Chinese brands such as Oppo and Vivo who have steadily moved to offer high-end models to challenge iPhones, stand to lose marketshare as bargain hunters choose Apple.

Earlier this month, several online retailers in China slashed prices of the iPhone 11 by as much as 18% - a tactic Apple has used in the past to boost demand. And while initial social media reaction to the new iPhone SE was muted, analysts said they were seeing a pick up in demand.

The cheaper iPhone SE could tempt iPhone owners to opt for a newer device, something they might have otherwise delayed in a weak economy, said Nicole Peng, who tracks the smartphone sector at research firm Canalys.

"People want to avoid uncertainty in a downturn," she said. "Having a brand like Apple that can showcase quality and make people less worried about breakdowns or after-sales service can bring in buyers."

CHEAP IS GOOD

Early data suggests that the Chinese smartphone market is recovering rapidly in the aftermath of the virus, and Apple has emerged relatively unscathed.

Sales of iPhones in China jumped 21% last month from a year earlier and more than three fold from February, government data showed, meaning March-quarter sales in the country were likely to have slipped just 1%.

To be sure, a recovery in Chinese demand won't offset sales lost in the United States and Europe. And the company is yet to launch a smartphone enabled with 5G wireless technology like those offered by Asian rivals, a disadvantage for Apple so far.

But those same expensive 5G models may not sell well in the current climate of frugality, analysts said.

"If there are no massive subsidies (in China), I doubt there will be many smartphone users who will be eager to upgrade to 5G," said Linda Sui, who tracks the smartphone sector at research firm Strategy Analytics.

Sui expects iPhone shipments in 2020 to be down 2 percentage points at the most, versus double digit declines at Chinese firms.

Apple also has revenue from its services business to fall back on. It has leveraged its large iPhone customer base to boost services revenue from music, apps, gaming and video. "Apple's Services segment should remain resilient in today's work-from-home environment, thereby demonstrating the durability of Apple's model," Cowen analyst Krish Sankar said.