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Apple’s Revised Guidance For China Would Be Excellent News For Samsung

While Apple’s detractors scramble to portray the company’s reaffirmation of guidance as evidence of a “lack of innovation” or “excessive pricing,” the reality is that it merely demonstrates that President Trump’s tariff war on China has harmed a key Apple market. Apple has never been in a better position, and its competitors are currently performing so poorly that any of them would give anything to be in Apple’s position.

Unfortunately for Apple’s rivals, they are inferior to Apple. Even as the global economy teeters on the brink of recession, the iPhone manufacturer seizes nearly all of the world’s profits. The producers of Android commodities with the lowest profit margins will be hardest hit by the global trade turmoil.

Apple has net cash reserves of $123 billion to withstand a recession. This is not the case for Samsung, Pixel, Surface, and the various low-margin commodity phone manufacturers in China, who will need to demonstrate return potential to continue expanding shareholder cash on hardware experiments.

Every Android or Windows hardware manufacturer to date, including Google and Microsoft, has demonstrated a complete inability to profit from hardware sales, even during economic expansions. It will not be easier during a recession! Apple has demonstrated its ability to profit regardless of market conditions, allowing it to invest its boom-time resources in overcoming a global recession.

We know this to be true because it happened ten years ago. In 2008, while the tech media was ridiculing Apple for being poorly positioned as a luxury-tier consumer product maker amid negative “global macroeconomic indicators,” nobody seemed to notice that Apple’s former competitors were the hardest hit: Motorola, Palm, Nokia, Blackberry and other firms that once sold tons of cheap phones; HP, Dell, and other commodity PC makers; and Sony and other consumer electronics producers who suffered disaster once their low-middle-tier products were supplanted by Apple’s high-end products

Apple, on the other hand, continued to sell iPods and iPhones at premium prices while its competitors with razor-thin margins disappeared. In addition, the company continued to invest in custom silicon, new device form factors such as the iPad, new software and services, such as the new App Store for iOS, and substantial investments in annual new OS software updates. Apple emerged triumphant and strengthened.

Samsung was the only other phone manufacturer to survive, and it did so by copying Apple’s brand and products so closely that it appeared to be a budget, store-brand equivalent. However, this imitation was fragile. As soon as Samsung began to follow its muse, its smartphone business began to deteriorate, and its attempts to match Apple’s efforts in silicon, tablets, music, apps, Siri, Apple Pay, and other areas failed. Today, Samsung’s mobile phone division is a drag on the company’s overall performance.

This panic recurred at the end of 2012 (fears regarding Apple’s ability to “innovate”) and in 2014 (fears regarding Apple’s ability to sell phones in China), as evidenced by the share price chart for Apple. Currently, it is believed that a six to ten percent decline in expected revenues should cause Apple’s stock to plummet by more than 30 percent, given that the company was already valued as if it would never grow.

That is an opportunity, not reality. Recall that Apple has already allotted $71 billion for the repurchase of its stock, which is now available at a massive discount due to the relentless manipulation of financial reporting that has only intensified since Thursday morning.

Amid a tariff war’s bloodbath, Apple’s revenue correction is a minor blip

Trump’s tariffs have erected a formidable barrier to international commerce. His administration has erected trade barriers, withdrawn the United States from trade pacts, and destroyed domestic industries that rely on Chinese consumers.

U.S. soybean farmers appear to have completely lost their crucial Chinese market, as exports there are now at zero. U.S. producers of finished goods such as cheese and processed meat are also experiencing a decline in exports. Despite this, Apple, which relies on China for nearly 20 percent of its iPhone sales, has reported minimal effects during a full-scale trade war.

Apple’s revised revenue forecast for the December quarter decreased by 5.6% to 9.7% from the range it had previously provided. Apple’s global revenues are so large that a $5 to $9 billion decline is still a single-digit percentage drop, and will not significantly affect the company’s profit margins. Apple stated that “we expect to report a new record for Apple’s earnings per share” despite the anticipated decline in revenues, owing to its inherent profitability and strategic share buybacks.

This is in stark contrast to other major smartphone manufacturers, whose sales have plummeted as consumers shift to cheaper models, erasing their profits. Apple remains the leading high-end vendor in China and the world, satisfying the vast majority of demand for high-end smartphones and capturing virtually all of the industry’s profits.

In a competitive market, it becomes nearly impossible to rebuild a business following a decline in profits. Globally, Samsung’s Galaxy IM Mobile segment has been failing, dragging down the company’s other relatively successful businesses, such as Display Panels and other components. Instead of a slight single-digit decline in demand in China, Samsung has collapsed from the country’s largest producer to eighth place, with little hope of ever regaining market share from the new domestic low-end leaders.

And while Huawei, Xiaomi, and other domestic brands take turns producing the most phones in China, none of them are making any real money, putting them on the verge of being replaced by one of the five other brands that build phones without creating loyal users or generating profits that can sustain them during a recession. According to Counterpoint Research’s Market Monitor, the commodity market is shrinking while the premium phone market is “driven by new iPhones.”

Apple is expanding across multiple industries as a result of iPhone penetration

While iPhone revenues are suffering due to China’s economic slowdown caused by tariffs, iPhone sales continue to expand Apple’s installed base. In fact, according to Apple’s note to investors, “Our installed base of active devices reached a new record high, increasing by more than 100 million units in one year. More Apple devices are being used than ever before, which is a testament to our customers’ ongoing loyalty, satisfaction, and engagement.”

And even though a significant portion of Apple’s revenue is derived from iPhones — the segment that is suffering due to the economic impact of tariffs in China — the company’s overall sales are continuing to grow significantly. Services sold to the vast installed base of iPhone users, in addition to Macs, iPads, Wearables, and other accessories, are up 19 percent year-over-year.

independently, Apple stated, “Services generated over $10.8 billion in revenue during the quarter, setting a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020.”

The company also reported that “Wearables grew by nearly 50 percent year-over-year, as Apple Watch and AirPods were wildly popular with holiday shoppers; launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth, and the launch of the new iPad Pro drove iPad to year-over-year double-digit revenue growth.”

Samsung would love to sell its old smartphone customers Galaxy Gear watches, tablets, PCs, apps, and cloud subscriptions, but it’s not doing so. Except for Galaxy phones, Samsung’s IM Mobile division (which offers a device portfolio very similar to Apple’s) engages in little more than busywork, producing minimal quantities of products that it cannot sell profitably. When phone sales decline, the company’s profits collapse, and there is no supplementary growth to fall back on.

It’s the same for China’s Android manufacturers, who can’t even profit from selling large quantities of phones. Aside from handsets, they generate almost no revenue from the sale of PCs, tablets, watches, other wearables, internet services, and other ventures. Xiaomi’s loss leader phone sales were ostensibly positioned as a means to build a user base from which to sell services. However, this never transpired. Currently, the company is limited to manufacturing rice cookers and other basic appliances.

Apple has unparalleled success in selling new products to its existing customer base.
The possibility of “Peak iPhone” — the notion that Apple is running out of customers for its signature iPhones — has been discussed for years. At some point, it became apparent that the company would need to diversify beyond the sale of iPhones if it wished to maintain its revenue and profit growth.

Apple is currently capturing almost all of the industry’s available profits, primarily by creating a new class of ultra-premium iPhones and effectively selling them to consumers. The only remaining option is to sell these users new products and services. And this is something that Apple has excelled at while its ostensible competitors have failed miserably despite desperate attempts to mimic Apple’s actions on the surface.

The future of smartphones is not limited to inexpensive commodity smartphones. Rather, it is transferring voice and video communications, text messaging, music, applications, and other computing tasks to new form factors that are in some ways superior to a hand-held, pocket-sized mobile device. iPad, which Apple has turned into a roughly $20 billion per year business, and Apple Watch, which continues to grow rapidly even though smartwatches were virtually nonexistent just a few years ago, are examples of such devices.

And rather than cannibalizing its iPhone business to deliver “the next thing,” Apple has supplemented its core business with growth in tablets and wearables, creating an ecosystem that spans multiple form factors and integrates them with Continuity features.

AirPods, Apple’s innovative wireless headphones, is the ideal complement to Apple Watch. It is also creating new reasons for people to want and purchase a conventional Mac notebook or desktop — a technology platform dating back to the 1990s and even earlier, but kept current as a means to develop interactive digital content for the mass market of mobile users on iPhones, iPads, Macs, and other development targets.

Apple excels in more than just the marketing of new and old hardware devices. It has created a massive market for selling apps and software as a subscription, taking a sustaining cut that has transformed the App Store from a simple listing of software into a curated collection of titles. This has created a massive market for iOS software, which is generating billions of dollars in development across not only iPhone consumers, but also enterprise customers who are making permanent investments in iOS development and hardware, including IBM, Salesforce, SAP, Deloitte, and Cisco, among others.

Beginning this summer, Apple is working to adapt its vast portfolio of iOS software to run on Macs as well, expanding the utility of its conventional Mac platform and bringing its iOS and macOS platforms closer together for users.

Apple has also invested in custom silicon design, beginning with mobile CPUs and expanding into graphics, neural net machine learning logic, custom storage controllers, and advanced imaging processing, all of which are prohibitively expensive and difficult for competitors to match.

Google has invested vast sums in image signal processor (ISP) silicon to make the Pixel phone’s camera superior, but it cannot compete with Apple’s ISP in video capture and is not selling enough Pixel devices to fund the next few generations of image silicon advancements. Apple sells cameras; it is now the world’s most popular and advanced camera vendor, a fact that few people have even noticed.

Qualcomm is still ahead of Apple in modem technology, but this advantage is becoming increasingly irrelevant as consumers are unable to distinguish between gigabit and 1.2 gigabit chips because the fastest mobile networks operate at speeds well below 100 megabits. Qualcomm, which was once comfortably positioned as the leader in mobile chips, is now more than a year behind Apple in CPU, graphics, imaging, and machine learning, and is also running out of component buyers for its premium chips for high-end phones on non-iOS platforms due to the lack of demand for high-end Androids.

Huawei and other Android manufacturers are currently developing their internal chips, but these efforts lag significantly behind Apple’s technological advancements. And the primary reason is that Apple has sold almost all of the high-end devices that generate revenue and create future demand for even faster chips. Not only smartphones but also high-end tablets, a market that Apple has effectively dominated since the introduction of the iPad a decade ago.

A few years ago, the tech media praised Google’s $150 Nexus 7 tablet for being incredibly affordable. These tablets cannot even run the most recent version of Android. Google has exited the Android tablet market, and there is no money driving the development of new generations of performant Android tablets because nobody is willing to pay for them.

Certainly not enterprise buyers, who have been investing in iOS tablets while the tech media has been fixated on cheap Google netbooks being dumped on K12 schools, an economic miracle about as effective as giving everyone a cheap fish.

IDC was recently compelled to note that Apple continues to dominate the entire global tablet market “unabatedly.” Apple’s tablet sales are increasing while the tablet market as a whole continues to decline.

The “question” of innovation

Despite Apple’s broad and deep success, which has only been diminished by a global assault on trade and a full-scale tariff war between its two largest markets, as well as an explicit explanation detailing precisely why Apple has revised its revenue forecast for the December quarter, tech media writers still appear to be completely confused about what’s going on.

Tim Cook, Apple’s chief executive, attributed lowered revenue projections to sluggish demand for new iPhones in China. However, Kara Swisher of Recode told CNBC that she believed Apple’s problem was also an “innovation problem.”

Swisher remarked that Apple’s innovation cycle has slowed down. Where is this company’s exciting new product and where are its exciting new entrepreneurs?

Cook himself addressed this, noting that Apple’s products and services outside of iPhones are experiencing significant growth. He stated explicitly in his note to investors that one of Apple’s issues was not a media-invented lack of consumer interest or lack of “innovative” hits, but rather Apple’s inability to keep up with demand. Cook created the “exciting new product” that Swisher questioned in a key point of his investor note.

“We knew we had an unprecedented number of new products to ramp up during the quarter and anticipated that supply constraints would limit our sales of certain products during the first quarter,” he explained. “Again, the outcome was largely consistent with our expectations. Apple Watch Series 4 and iPad Pro sales were limited for the majority or entirety of the quarter. AirPods and MacBook Air were also subject to limitations.”

Apple has just purchased a theater to showcase its latest technological innovations, including an EKG-capable watch and an all-new lineup of iPad Pros and MacBook Airs, to the tech media. In three months! How often must Apple sing and dance for these grouchy cynics who pretend to never be impressed?

As an aside, Swisher stated that she was impressed by Amazon, but did not specify whether it was the innovative failure of Alexa to serve its stated purpose as an inducement for online sales, the innovation of purchasing a grocery store, or perhaps Jeff Bezos’ incredible innovations in bamboozlement, such as charting data without actual measurements, that impressed her.

Cook stated quite clearly that the reason for Apple’s anticipated revenue decline was not a mystery that the media needed to interpret and elaborate on, but that won’t stop them.

Cook stated unequivocally, “lower-than-expected iPhone sales, primarily in Greater China, account for the entirety of our revenue shortfall relative to our guidance and much more than our entire year-over-year revenue decline.”

Cook added, “We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands, and Korea, as well as some emerging markets, including Mexico, Poland, Malaysia, and Vietnam.”

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The above article was written by the BestTopReviewsOnline team, which consists of some of the most knowledgeable technical experts in the United States. Our team consists of highly regarded writers with vast experience in smartphones, computer components, technology apps, security, and photography, among other fields.

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