Apple to thank Year of Tiger for China Surprise in iPhone strong quarterly sales

I am of course curious to see exactly how it happened that the iPhone so completely surprised the whole industry and its analysts in unit sales. Previous years the iPhone sales cycle fell after the Christmas quarter. The analysts came with estimates from 6.8 million to 7.8 million - sequential decline of from 10% to 20%. Just about nobody suggested iPhone sales would hit the same level as Christmas 2009 quarter sales of 8.7 million. So of course I am very interested to try to figure out what happened. Where did the surprise sales come from, of about a bonus million unit sales in just one quarter.


UPDATE JULY 27 - My hypothesis was finally verified by CNBC which today has reported that China Unicom has over 2 million iPhones in use, which was under 400,000 by the end of Q4 of 2009. Most of that sales was in Q1. So the 'missing million' have been confirmed to have come from China, as I suggested in this controversial blog article in April. See full final story China Missing Million Confirmed.



Apple CFO Oppenheimer said in the quarterly results conference call that the Chinese market has been very strong for the iPhone and over a half-year period had generated 1.3 Billion dollars of sales for the iPhone. If we use the average sales price of the iPhone at 600 dollars as Apple reports, it suggests China sold about 2.2 million iPhones over two quarters. Now how would that split? China is not a 'western' country where Christmas is the big gift-giving season. The big annual gift-giving holiday for the Chinese culture is the Chinese New Year, which follows the lunar calendar (is not the same calendar day every year). This year Chinese New Year, the Year of the Tiger, stated on February 14, 2010.

Early on in 2009 when the iPhone was introduced to the Chinese market, it was reportedly selling 'very poorly' being 'too expensive'. The sales were probably in the low hundreds of thousands per quarter. But for the last 2 quarters, we know sales were about 2.2 million units. I would suggest there is first a general growth trend so the newest quarter is better than the previous quarter. But as this is China, it means its 'Christmas bump' in sales is nearly meaningless, thus the October-December sales of iPhone in China is 'far below the world average' for the Christmas quarter - but then, the Chinese New Year quarter - Jan-Mar 2010 - would be the big bump in Chinese iPhone sales.

I obviously don't have the numbers, but a very reasonable pattern would be that the July-September iPhone sales were perhaps 250,000 units, then the 'Christmas quarter' October-December sales were about 500,000 to 600,000 units, and now the January-March quarter with the Year of the Tiger celebrations and gift-giving, would be 1.5M to 1.6M units.

Here we have the 1 million surprise sales units. Its the Chinese new year's gift. By this pattern, iPhone sold about half a million in last quarter 2009 and 1.5 million in the first quarter of 2010, and a giant bonus sales level for Apple to surprise all analysts. Obviously China is very secretive and difficult to find data, so most analysts would also easily not see that happening. Even me here in Hong Kong am hearing more about the pirated clones of the iPhone in China than actual 'dramatically growing' iPhone sales.

I am pretty sure here is the key to iPhone's sales pattern. They can thank the Chinese new year and received a prosperous and powerful Year of the Tiger gift from the Chinese consumers. Expect this pattern to hold from now on, that China gift sales will help compensate for after-Christmas quarterly sales for the iPhone.

Note this makes Nokia numbers even more interesting for Q1 of 2010. Nokia is bestselling phone brand and bestselling smartphone brand of China. If Nokia's current smartphone lineup - which includes many far cheaper smartphones than iPhone - was popular this New Year as gifts in China, could bode well for Nokia numbers as well. We have to see, Nokia reports in two days.

UPDATE LATE EVENING 21 APRIL - I have now had more time to digest and dig into my early gut feeling. And the hypothesis seems very strong. I found that the iPhone's Chinese distributor, China Unicom the worlds' second largest mobile phone operator/carrier (and exclusive iPhone dealer in China) sold 200,000 iPhones in total in 2009. Meanwhile some comments pointed out that Apple did not say the 1.3 Billion dollars were exclusively iPhone, so they included all Apple products and also that it was sales in the China Region which includes Hong Kong and Taiwan. Very good clarifications. Hong Kong's population is 7 million, Taiwan's is 20 million, China's is 1.3 Billion. Even as both Taiwan and Hong Kong are 'wealthier' by per-capita GDP, by most international comparisons the major metropolitan cities like Beijing and Shanghai - both of roughly 20 million inhabitants just in those metro areas - are as wealthy as Taipei or Hong Kong. But nonetheless, these are important clarifications.

Now on Mac sales - about half of all Mac sales are in the USA. Asia is only one of the other five inhabited continents and China only one of the countries in China. IDC reports that Apple's market share for PCs in China is 1%. So out of Apple's quarterly revenues, it suggests that the Mac did not deliver the lion's share of the 1.3 Billion dollars. On the iPod I haven't been monitoring recent stats, but I do remember from a few years ago, that Apple said that due to the vast array of low-cost MP3 players, China was one of the iPod's worst markets. I think its very fair to assume - as Apple won't give us an accurate breakdown - that the vast majority of the 1.3 B dollars was iPhone sales in China.

But my initial assumption was that the sales would have been half a million in the Christmas Quarter and 1.5 million in the January Quarter. Now that we know total sales in 2009 was 200,000, to get a 'bonus incremental sales' of 1 million iPhones - the China Synrdome of the 'missing million' so to speak - we need January Quarter sales of 1.2 million iPhones and thus 2 quarter cumulative sales of 1.4 million iPhones inside of China. That means at an average sales price paid to Apple of 600 dollars, we need to 'find'' 840 million dollars of iPhone total sales in China in the past 6 months. Out of the reported Apple number of 1.3 billion thats about two thirds. I think this is very reasonable. I am confident we have found our missing million.

Oh, one more tidbit. Some said that I don't know my China economics and culture, that the Chinese 'only' give red envelope gifts containing cash for Lunar New Year. I say it is the customary traditional gift, in particular to more distant relatives - to give envelopes of cash. But the time of the Lunar New Year is the biggest gift-buying period of the Chinese calendar, far more so than the 'Western' Christmas season. I am, not saying the red envelopes have in any way disappeared. But for example here in Hong Kong the local government Census and Statistics Department reports that the weeks prior to the Lunar New Year are the seasonal peak in consumer retail purchasing. I don't think it can get more clear than that.

But it can. I see the temporary gift-wrapping shop assistants in all major retail stores here in the days leading to the Lunar New Year. When I was in Beijing for the Lunar New Year a while back saw exactly the same pattern there. And everybody seems to be carrying branded store shoppiong bags with wrapped gift boxes - the subway full of the consumers here in Hong Kong just before Lunar Year. Yes, the Chinese do buy gifts for New Year. 

And there's more. Many retailers, and Chinese market analysts also report that Chinese consumers, especially the new rich and middle class, have taken to buying luxury gifts to their most dearest loved ones (children, parents, spouces, not distant relatives) for Lunar New Year. Yes, its true that the traditional red envelope is the most common gift stil today, but don't tell me the Chinese don't give also 'real' gifts for New Year.

So, if the two weeks prior to Feb 14 were the peak sales period for China, and Chinese have taken to giving luxury gifts for Lunar New Year, this finding is totally consistent with Apple's announcement that their China Region sales have exploded and they generated 1.3 Billion dollars worth of sales here. Ane specifically of the iPhone, as China Unicom told us that 2009 sales was only 200,000 units (ie 120,000 dollars worth - under 10% of Apple's new income), then yes, the big iPhone sales were in the January quarter, not the Christmas quarter.

Lastly on the analysts - I do think that us all who were forecasting iPhone sales, in our models, we were very reasonably discounting iPhone chances in China. In December 2009 we heard reports ranging from iPhone total sales of 10,000 units (later found to have been a bad translation with one zero missing) to 100,000 units. From the 'best case' of 100,000 units by December, to 1.4 million level sales in first quarter 2010 - is a huge jump with no obvious rationale. The iPhone was new to the Chinese market and China experts were telling us that the iPhone was too expensive for that market, and that dozens of cheap pirated clones already existed. It was easy for all analysts to assume China would be small in 2010. In particular as that country tends to be very secretive and recent accurate data is often very hard to find. So I do think we know also 'why' this number was so wrong in the analyst reports and forecasts. And haha, while I was obivously off by more than a million - I did say my forecast was for 7.4 million unit sales - at least I was on the upper end of the forecasts most of which ranged from about 6.8 million to 7.5 million and the April 20 morning average of all major published forecasts was 7.1 million. I did not get it right, but where we all made errors, at least my error was significantly less than most haha.. We cannot get it all right, we try to minimize the errors when they happen. And we try to learn why when we get it wrong.

UPDATE JULY 27 - My hypothesis was finally verified by CNBC which today has reported that China Unicom has over 2 million iPhones in use, which was under 400,000 by the end of Q4 of 2009. Most of that sales was in Q1. So the 'missing million' have been confirmed to have come from China, as I suggested in this controversial blog article in April. See full final story China Missing Million Confirmed.

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