SILICON VALLEY -- Apple recently reported an increase in net profit in the April-June term, its second straight quarterly jump. Credit went to "special demand" for the iPhone from customers of China Mobile Communications, the world's biggest mobile phone service provider, with more than 700 million users.
But that demand may be on the wane. "Apple's smartphones are expensive," said a man in his 20s who was checking out iPhones at the Apple Store in China Central Mall, the U.S. company's largest directly run outlet in Beijing, in the Dawanglu commercial district. "Next time, I think I'll buy a Xiaomi" model.
Beijing's Xiaomi Technology makes smartphones that resemble the iPhone but at about half the price. It grabbed around 20% of the Chinese smartphone market in the first half of this year, surpassing Apple's share.
Worse still for Apple, China's major telecom carriers are cutting back on smartphone subsidies by 20% or so in response to a government edict. Last year, they paid an estimated 200 billion yuan ($32 billion) in subsidies.
China's telecom companies subsidize each iPhone to the tune of nearly $400. These subsidies and huge investments in cellphone networks have cut into profits. As such, the carriers are embracing the government's subsidy guidance.
The move smacks of a protectionist industrial policy that supports Chinese makers of low-cost handsets while facilitating the upgrading of networks. A gradual cut in smartphone subsidies threatens Apple's Chinese operations -- a big profit driver for a high-end company.
One countermeasure Apple has taken is to sell previous-generation models alongside its latest shiny gadgets. In fact, the current top-selling iPhone in China, the 4S, is two generations removed from the current 5S. It sells for about 60% of the price of the latest model. As a result, the average unit price of all iPhones has fallen about 4% in the past year.
Apple is also selling secondhand products on a trial basis on its website. At the bottom of a page on its online sales site, the words "refurbished products" can be found in small letters. This is a hyperlink to another page that offers used models that Apple refurbishes, certifies and guarantees.
Mohammed Elalj, CEO of RefurbMe, a Hong Kong-based Internet venture that runs a shopping site linked to Apple's official secondhand products site, said he feels China will rapidly grow into a sizable market for refurbished Apple products. His site does not handle iPhones.
In June, a low-profile virtual store selling used iPhone 5 smartphones opened on eBay, the big U.S.-based e-commerce company. A similar store had existed in 2012. Refurbished models billed as "Apple Certified, One-Year Warranty" can be had from the site. It is evident that Apple is tapping into the secondhand market as part of its China strategy ... but all on the hush-hush.
For now, it is unrealistic for the great majority of emerging-market consumers to buy refurbished Apple products through these websites due to the $100 or so delivery charge. But it is only a matter of time until Apple leans heavier on this sales approach in countries where people's purchasing power remains low.
Selling previous-generation and refurbished models is a rational solution for Apple, which needs to lower its price points in emerging markets and protect its brand at the same time.
CEO Tim Cook has said that this route into emerging markets helps Apple expand its customer base more than it erodes the market for new products. An added benefit is that the expanded customer base means more software sales.
Yet, according to U.S. research firm Flurry, Xiaomi handset users spend 7% longer on apps than iPhone users do. And that could spell trouble for Apple, which prides itself on user-friendliness.