Apple Inc.'s iPhone Falls Behind Xiaomi and Huawei In China

Apple was the top smartphone maker China in the first quarter of 2015, but it slipped to third place in the second quarter, according to new data from research firms Canalys and Counterpoint Research. The reports caused Apple stock to slip over 2% on Aug. 4.

An Apple Store in Shanghai. Source: Apple.

Counterpoint claims that Apple claimed just 12.2% of the market, putting it behind Xiaomi and Huawei's respective shares of 15.8% and 15.4%. In the first quarter, Apple led the market with a 16% market share. Canalys hasn't released full market share figures yet, but its overall rankings are the same as Counterpoint's.

Should investors worry about Apple's apparent slowdown in the world's largest smartphone market?

Xiaomi and Huawei bounce backXiaomi recently launched the Mi Note Pro, anupgraded version of its popular Mi Note phablet, and the new low-end Redmi 2. In the first half of 2015, Xiaomi's smartphone shipments rose 33% annually to 34.7 million units. That growth sounds impressive, but it represents a steep slowdown from the triple-digit growth it posted in previous years. It also indicates that Xiaomi will miss its prior full-year forecast for 80 million to 100 million shipments in 2015.

Xiaomi's popular Mi Note. Source: Xiaomi.

Meanwhile, Huawei experienced robust demand for its new Honor smartphones, which are sold through the same low-margin, online-only business model asXiaomi. That growth boosted Huawei's smartphone shipments 39% annually to 48.2 million unitsin the first half of 2015. Unlike Xiaomi, Huawei expects to hit its sales target of 100 million smartphones by the end of the year. Huawei's overall sales are higher than Xiaomi's because it sells its phones in more overseas markets than Xiaomi, which generates most of its sales from China.

Reading between the linesApple lost market share in China, but it also didn't introduce any new products during the quarter. Instead, its second-quarter sales were fueled entirely by the iPhone 6 and iPhone 6 Plus, which were launched last October. Therefore, Apple's market share could bounce back quickly once it launches its new 6s models later this year.

We should also remember that iPhone sales rose 35% annually worldwide to 47.5 million units last quarter. Apple didn't disclose how many units were shipped to China, but CEO Tim Cook stated that iPhone shipments to the region soared 87% annually. That was an impressive feat, since China's smartphone market contracted annually for the first time in six years during the first quarter, according to IDC.

Why Apple investors shouldn't worryComparing Apple to other smartphone makers is an apple-to-oranges comparison for two simple reasons. First, Apple and Android handsets exist in two different software ecosystems. Customers who want an iOS handset must buy an iPhone. Those who prefer Android have a lot more choices. Since users get locked in by digital purchases on iOS or Android, the iPhone doesn't directly compete against Xiaomi or Huawei's Android handsets.

Second, Apple is a well-established luxury brand in China. Last year, the Hurun Research Institute reported that Apple was the top luxury brand for gift-giving among China's richest, crushing classic brands such as Cartier, Hermes, and Louis Vuitton. Xiaomi and Huawei, being discount Android brands, naturally didn't make the cut.

The iPhone 6. Source: Apple.

That snob appeal lets Apple sell cheaper hardware at premium prices, which gives it an enviable mix of high margins and strong sales volume. As a result, Apple swallowed up 92% of the world's smartphone profits during the first quarter, according to Canaccord Genuity analyst Mike Walkley, although it controlled only 18% of the overall market.

The bottom lineIn my opinion, investors shouldn't fret about Apple's market share dip in China. As long as Apple retains its premium appeal and expands its walled ecosystem in China, people will faithfully line up for new products such as the iPhone 6s. I'd only be concerned if the iPhone 6s fails to boost Apple's market share in China later this year.

Meanwhile, a slowdown in the overall smartphone market should hurt Android rivals -- which must fight both a sluggish market and each other -- more than Apple. Therefore, instead of comparing Apple with Android smartphone makers, investors should compare Apple's sales performance with its own in previous years.

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Leo Sun owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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