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Apple's China revenues fall 10% as analyst claims iPhone has 'gone out of fashion'

  • Apple reported revenue in China that fell 10 percent year-on-year in the fiscal third quarter to just over $8 billion.
  • Chief Executive Tim Cook said he was "encouraged" by Apple's performance in China.
  • Analysts said the iPhone has "gone out of fashion in China".

Apple's iPhone has "gone out of fashion in China" which is holding back its performance globally, according to one analyst, but CEO Tim Cook said a continued good relationship with WeChat owner Tencent could help it gain users.

Greater China revenues for Apple fell 10 percent year-on-year in its fiscal third quarter to just over $8 billion. It marks yet another quarter of decline for the U.S. tech giant.

In contrast, domestic brands Huawei, Oppo and Xiaomi all recorded double-digit growth globally, driven by a strong performance in the world's largest smartphone market.

"Apple's iPhone has gone out of fashion in China and this is placing a cap on its worldwide performance," Neil Mawston, executive director at Strategy Analytics, said in a note on late Tuesday.

"Attention will now turn to Apple's rumored iPhone 8 introduction later this year and whether its tenth-anniversary flagship model will be different or exciting enough to ignite a rebound in iPhone volumes."

The iPhone 8 is rumored to be launched in September and a number of leaks have suggested it will be Apple's most advanced phone yet. This is something that could appeal to Chinese consumers who have taken a liking to the high-spec devices put out by domestic rivals Oppo and Vivo. Both brands along with Huawei have posed stiff competition to Apple in China.

'Encouraged'

But Chief Executive Tim Cook remained upbeat on the earnings call.

"We were very encouraged by the results this quarter. We improved as we thought we would from the previous quarters a little more than I thought we would," Cook said on Tuesday.

A customer inspects two Apple iPhone 7 smartphones at an Apple Store in Shanghai, China.
Qilai Shen | Bloomberg | Getty Images
A customer inspects two Apple iPhone 7 smartphones at an Apple Store in Shanghai, China.

He cited that in mainland China was actually flat year-on-year in terms of revenue. In Apple's results, it does not break out mainland China separately but wraps it into revenues for greater China, which includes Hong Kong.

The company has been making moves to help appease the government in China. For example, Apple pulled a number of virtual private network (VPN) services from the local version of the App Store. VPNs allow users to circumvent Chinese government restrictions online.

WeChat a 'nullifier' for Apple

Analyst Shannon Cross from Cross Research asked Cook to comment on China's largest messaging app WeChat. Tencent recently said its app WeChat had 938 million monthly active users.

Cook said he sees Tencent as a valuable partner because even though Apple's iOS operating system doesn't have a large market share in China, the development of WeChat on iPhones could help grow users.

"In terms of WeChat, the way that I look at this is because our share – because iOS share is not nearly a majority of the market in China, the fact that a lot of people use that, it makes the switching opportunity even greater," Cook explained.

WeChat is more than a messaging app. It has a number of services such as music streaming and payments built into the app. Apple has struggled to grow as strong an ecosystem in China as it has in Western markets because of rival services in China. For example, Apple Pay competes with both WeChat and Alibaba's Alipay platform.

And this trend is worrying, analysts say.

"Apple is losing the stickiness of more core services because of WeChat," Neil Shah, research director of devices and ecosystems at Counterpoint Research, told CNBC by phone on Wednesday.

He called WeChat a "complete ecosystem" in itself, meaning that it doesn't matter if users own a phone running Google's Android operating system or Apple's iOS. This is a problem for Apple in the long run.

"The effect is profound and WeChat is a nullifier of Apple's ecosystem stickiness in China," Shah said.