iPhone 16: Apple's China Challenge

iPhone 16: Apple's China ChallengeOver the past year, Apple's dominance in China's high-end market has begun to waver as Huawei returns to the 5G smartphone market. Data released by market research firm Canalys shows that in the second quarter of this year, Huawei's shipments in China's high-end smartphone market (over $600/approximately RMB 4300) surged by 82% year-on-year, capturing a 30% market share and ranking second in China

iPhone 16: Apple's China Challenge

Over the past year, Apple's dominance in China's high-end market has begun to waver as Huawei returns to the 5G smartphone market. Data released by market research firm Canalys shows that in the second quarter of this year, Huawei's shipments in China's high-end smartphone market (over $600/approximately RMB 4300) surged by 82% year-on-year, capturing a 30% market share and ranking second in China. Meanwhile, Apple experienced a 7% decline during the same period. The iPhone 16 series, launched on September 10, is seen as Apple's frontline against Huawei's offensive. However, this new series faces fierce competition from both Huawei and other Chinese mobile phone manufacturers. Additionally, it must contend with two key localization challenges: "Apple Tax" and AI localization. Whether Apple can overcome these two hurdles will directly determine the fate of the iPhone 16 in the Chinese market.

iPhone 16: Changes and Upgrades

The iPhone 16 maintains the design aesthetics of previous generations, with subtle tweaks in color combinations, camera control buttons, and the width of the Pro model's frame. Notably, the newly added "Camera Control" button is a physical button, contrary to previous speculations of a solid-state one. Users can activate the camera with a single press and adjust camera parameters, take photos, and record videos through touch, clicks, and double clicks.

The most significant software update for the iPhone 16 is undoubtedly AppleIntelligence. Apple CEO Tim Cook even emphasized it separately during the launch, stating that "the new generation of iPhone is built entirely for AppleIntelligence." While AppleIntelligence's features were comprehensively unveiled at WWDC in June, three months later, the iPhone 16's version did not introduce any new functionalities. Essentially, the iPhone 16's AI features focus on text generation, image generation, smart notification management, and a new Siri integrated with large language models.

Although AppleIntelligence incorporates AI technology, the iPhone 16 doesn't stand out in terms of AI capabilities alone. Its strength lies in its seamless integration with the phone. For instance, users can directly generate greeting emails in their inbox without resorting to third-party AI tools for generation and then copying them to their mail.

In terms of hardware, the Pro and standard models continue to have chip differences. The iPhone 16/Plus is powered by the A18 chip, while the iPhone 16 Pro/Pro Max boasts the A18 Pro chip. Both chips are optimized for AppleIntelligence to effectively utilize generative AI large language models. The A18 chip boasts a 30% faster CPU compared to the A16 chip and a 60% improvement over the A14 chip used in the iPhone 12. However, Apple uses a clever trick in the performance comparison, comparing the A18 with the two-year-old A16 chip instead of last year's A17 and A17 Pro, suggesting that the actual upgrade of the A18 might be less impressive than the numbers presented at the launch.

In contrast, the A18 Pro chip on the iPhone 16 Pro appears more exceptional. Apple claims that the A18 Pro is "the fastest CPU in a smartphone today," boasting a 15% speed increase when running AppleIntelligence and a maximum 20% GPU performance improvement compared to the A17 Pro.

Sales Prospects: Opportunities and Challenges

TechInsights, a market research firm, indicates that Apple has stabilized its performance in the Chinese market through aggressive price discounts. A blend of more older iPhone models and the launch of the iPhone SE next year will stimulate demand in emerging markets. The improvement in the macroeconomic outlook of mature markets, favorable exchange rates, and technological innovations (such as AppleIntelligence and the anticipated iPhone 17 Slim) will also drive iPhone replacement sales in 2025. TechInsights predicts that Apple may surpass Samsung in 2025 to become the world's largest smartphone manufacturer.

However, the situation is vastly different in the Chinese market. Since the launch of the Huawei Mate60 series in August last year, the threat to Apple in China's high-end smartphone market has been intensifying. According to IDC data, in the first quarter of this year, Apple's share in China's over $600 high-end market fell from nearly 70% in the same period last year to around 56%. By the second quarter, Apple's shipments had dropped out of the top five, while Huawei's shipments increased by 50.2% year-on-year, placing it second in China.

With competitors closing in, two key localization challenges for Apple in the Chinese market become even more prominent: "Apple Tax" and AI localization.

The Controversy of "Apple Tax"

In early September, a rumor that "iPhone 16 doesn't support WeChat" exploded on Chinese social media. While this news lacked basic business common sense, the discussion it generated was unprecedented. The seemingly absurd rumor reflects the significant discord between Apple and WeChat, two giants, over "Apple Tax."

"Apple Tax" simply refers to the commission Apple App Store charges developers on their income. The main point of contention between Apple and WeChat lies in the revenue-sharing ratio and whether WeChat mini programs should be charged and how. Previously, mini programs on giant apps like WeChat and Douyin did not have to access Apple's payment system for in-app purchase revenue like regular apps on the App Store. Consequently, developers could circumvent Apple and direct users to external payment systems, thus avoiding the 30% "Apple Tax."

For example, when using WeChat mini games, users could navigate to the customer service session page through the in-game customer service center entrance and complete their top-up, bypassing the "Apple Tax." However, Apple clearly doesn't want to miss out on this piece of the pie. In August, it was reported that Apple intensified pressure on Tencent and ByteDance, demanding that they cooperate in sealing loopholes in WeChat and Douyin's payment systems. If they fail to eliminate developers' and users' ability to bypass Apple's ecosystem, Apple will reject subsequent app submissions from WeChat and Douyin to the App Store.

During the August earnings conference call, Tencent Chief Strategy Officer James Mitchell commented that the company was in discussions with Apple regarding revenue sharing for WeChat mini games. He mentioned that Tencent is considering offering in-app purchase services through Apple's iOS payment system, and if an agreement is reached, Apple will receive a certain percentage of the revenue share.

On September 6, reports emerged that Apple approved an update for the WeChat application in the upcoming iPhone 16, buying more time for negotiations with Apple on its demands for adjustments.

In reality, dissatisfaction with "Apple Tax" is not limited to WeChat alone. Even WeChat, boasting over 1.3 billion users, has to negotiate with Apple. Smaller developers have even more grievances. Public data shows that China has the highest "Apple Tax" globally, charging standard and small enterprises 30% and 15% respectively, while the figures are 27% and 12% in the US, 17% and 10% in the EU, and 26% and 11% in South Korea.

According to First Finance, among the top three revenue-generating regions for Apple, the Chinese market is the only one without a "other rate" option for "Apple Tax."

Based on statistics from third-party data research agency Sensortower, "Apple Tax" generated approximately $22.34 billion globally in 2023, equivalent to RMB 160.8 billion, of which the Chinese market contributed nearly 25%, or approximately RMB 40 billion. According to statistics from demandsage, as of 2023, there are over 1.46 billion active iPhone users worldwide. Additionally, QuestMobile data reveals that in 2023, there were approximately 250 million active iPhone users in China, representing around 17% of iPhone users worldwide. Combining these two sets of data, the Chinese market, with 17% of global users, generates approximately 25% of "Apple Tax" revenue, implying that "Apple Tax" in China significantly surpasses the global average.

Previously, the EU, South Korea, and other regions filed antitrust lawsuits against Apple due to "Apple Tax." In the Chinese market, consumers have also filed lawsuits against Apple for similar reasons. In May this year, the Shanghai Intellectual Property Court rendered a first-instance judgment in the first consumer antitrust lawsuit against "Apple Tax" in China. The court acknowledged that Apple clearly holds a dominant position in China's software market but dismissed consumer Jin Mou's lawsuit seeking to stop the unfair high-price behavior of collecting 30% "Apple Tax" and the bundled purchase behavior of forcing users to use Apple Pay for "in-app purchases."

Wang Qiongfei, founding partner of Zhejiang Kending Law Firm, the plaintiff's lawyer, stated, "We respect the first-instance court's judgment but insist that Apple's practice of collecting the highest 'Apple Tax' globally in China, without opening third-party payment and download channels, constitutes an abuse of its dominant market position. We will appeal this case to the Supreme People's Court."

Huawei, Apple's long-time rival