Why the Chinese aren't buying the Apple iPhone XR

Analysts on Wall Street were tripping over themselves last fall to sing the praises of the Apple iPhone XR. The phone was supposed to be Apple's response to consumers who complained about the pricing of the iPhone X in 2017; that phone became the poster boy for smartphone sticker shock as the $1,000 barrier was finally broken by Apple's premium model. Most of these so-called experts said that the iPhone XR, once it launched in October, would become the top-selling iPhone among the trio of 2018 models. And while they were right about that, none of them expected overall sales to be as low as they have been.

Priced at $749 and up in the states, Apple had to cut some corners on the iPhone XR to keep the cost down. For example, the device is equipped with a 6.1-inch LCD display instead of the costlier OLED panels that grace the iPhone XS and iPhone XS Max. It also relies on a single camera in back instead of the dual sensors on the other two 2018 models, and does not offer 3D Touch. But it does have the front-facing TrueDepth Camera, Face ID and the A12 Bionic SoC that powers the other 2018 iPhones. And it also has the best battery life of any iPhone ever.

The Wall Street Journal today notes that the world's largest smartphone market, China, has failed to embrace the iPhone XR to the degree Apple expected. As a result, last week Apple CEO Tim Cook announced that the company was lowering its revenue guidance for the first fiscal quarter that ended in December. That touched off a selling stampede in Apple's shares; the company, once the most valuable public firm in the world with a trillion dollar valuation, is now worth $703 billion and is looking up at Microsoft, Amazon and Google parent Alphabet in terms of market capitalization.

Part of the problem for weak iPhone XR sales in China is the price of the phone. At 6,499 yuan, the iPhone XR is priced a the equivalent of $946 USD in the country. And most of the features available on the device are available on lower priced Android models manufactured by Chinese companies. There also is a huge anti-American backlash growing in China thanks to the U.S.-China trade war, and the arrest of Huawei CFO Meng Wanzhou on a U.S. warrant. Some Chinese companies are fining employees who buy an iPhone, while subsidizing the purchase of handsets made by Huawei and other domestic firms.

To try and kickstart demand for the iPhone XR, Apple is offering a discount for those who trade-in an older iPhone model. This deal was expanded to 17 foreign markets, including China, last month. But in order to maintain its profit margin, Apple previously had to raise the price of the iPhone XR in China due to the rise of the U.S. Dollar against the Chinese Yuan. This took the price of Apple's handset above those made by Chinese firms like Huawei. In the letter he disseminated on Wednesday cutting Apple's revenue estimates, Tim Cook wrote, "we knew the strong U.S. dollar would create foreign exchange headwinds."

With Apple protecting its margins, the iPhone XR is priced higher than premium phones made by Huawei, like the P20 and Mate 20 series. Chinese manufacturers like Oppo and Vivo also offer flagship models that can be bought for less than the price of the iPhone XR in China.

One analyst says that the reason for the "failure" of the iPhone XR is Apple's miscalculation of demand. Talking to Apple's supply chain, UBS analyst Tim Arcuri figured back in October that Apple planned on 45% of its iPhone production to be made up of the iPhone XR. Arcuri boils down Apple's problem with the iPhone XR to one simple sentence. He says, "They just built too many XRs and people just aren’t buying them, particularly in China."