APPLE IN CHINA REPORT MATTHEW BRENNAN & SAMIN SHA CHINACHANNEL.CO PARTS OF THIS REPORT WERE FIRST DELIVERED AT THE DHL APAC REGIONAL CONFERENCE SHANGHAI IN MAY 2017

MATTHEW BRENNAN WECHAT EXPERT, SPEAKER, AUTHOR, HOST, CO-FOUNDER OF CHINA CHANNEL

MATTHEW IS A WELL-KNOWN SPEAKER AND WRITER ON THE TOPICS OF WECHAT AND THE CHINA DIGITAL ECOSYSTEM. REGULARLY QUOTED IN INTERNATIONAL MEDIA (THE ECONOMIST, BLOOMBERG, FORBES, THE FINANCIAL TIMES, BBC, TECHINASIA), HIS COMPANY ORGANIZES CHINA’S LARGEST WECHAT MARKETING CONFERENCE SERIES FOR INTERNATIONAL COMPANIES. MATTHEW’S COMPANY CHINA CHANNEL IS A CHINA FOCUSED TECH CONSULTANCY AND RESEARCH FIRM. HE HOLDS 13+ YEARS ON THE GROUND ENTREPRENEURIAL EXPERIENCE IN MAINLAND CHINA. CO-HOST OF THE CHINA TECH TALK PODCAST PRODUCED TOGETHER WITH TECHNODE, CHINA'S LARGEST ENGLISH LANGUAGE TECH MEDIA. HIS BOOK ‘BUILDING YOUR BUSINESS THROUGH WECHAT’ IS DUE FOR RELEASE LATER THIS YEAR.

EMAIL: [email protected] LINKEDIN: HTTPS://CN.LINKEDIN.COM/IN/MATTHEW-BRENNAN “WE CONTINUE TO BE VERY ENTHUSIASTIC ABOUT OUR OPPORTUNITY IN CHINA.”

TIM COOK MAY 2017

CHINACHANNEL.CO AFTER MUCH RESEARCH WE FOUND LITTLE TO BE ENTHUSIASTIC ABOUT…

WE FEEL RATHER LESS ENTHUSIASTIC…

CHINACHANNEL.CO THIS REPORT’S 3 CORE ARGUMENTS BACKED BY THE BEST PUBLICLY AVAILABLE STATISTICS AND DATA WE COULD FIND.

1. APPLE’S SERVICES ECOSYSTEM IN CHINA IS VERY WEAK AND IN MANY KEY AREAS NON EXISTENT.

2. THE PERCEPTION OF APPLE’S BRAND AMONGST CHINESE CONSUMERS HAS CHANGED FOR THE WORSE.

3. CHINESE SMARTPHONE BRANDS ARE RAPIDLY GAINING IN STRENGTH, SOPHISTICATION AND LOCAL MARKET SHARE.

CHINACHANNEL.CO PART 1 APPLE’S CHINA SERVICES ECOSYSTEM

CHINACHANNEL.CO “THE FUTURE OF THIS COMPANY IS GOING TO BE IN SERVICES.”

TIM COOK, VIA BLOOMBERG ***************************************

CHINACHANNEL.CO SERVICES IS APPLE’S ONLY SECTOR WITH CONSISTENT & STEADY GROWTH. SERVICES PLAY A KEY ROLE IN LOCKING IN USERS

25.5

21.2 19.7% 18.5

14.6%

10.2%

2014 2015 2016 SERVICES REVENUE IN BILLION USD GROWTH

CHINACHANNEL.CO DATA: APPLE INC. TO MANY AMERICAN IPHONE USERS IT WOULD BE UNTHINKABLE TO CHANGE THEIR IPHONE TO AN ANDROID DEVICE. THEY ARE LOCKED IN TO APPLE SERVICES.

CHINACHANNEL.CO TO MOST CHINESE IPHONE USERS THE IPHONE IS JUST A LUXURY PHONE. THEY HAVE NO SIGNIFICANT INVESTMENT IN APPLE’S SERVICES ECOSYSTEM

CHINACHANNEL.CO APPLE’S CHINA SERVICE ECOSYSTEM HAS BEEN SYSTEMATICALLY STRIPPED AWAY BY LOCAL COMPETITORS

CHINACHANNEL.CO IBOOKS / ITUNES

CHINACHANNEL.CO FROM APRIL 2016 IBOOKS AND ITUNES STORE HAVE BEEN BLOCKED IN CHINA. CHINESE AUTHORITIES ORDERED THEM TO BE TAKEN OFFLINE.

CHINACHANNEL.CO “THOSE 2 STORES* FOR THE MONTHS THAT WE HAD THEM OPERATIONAL, WHICH WAS SEVERAL MONTHS, THE REVENUE WAS LESS THAN $1 MILLION.”

TIM COOK, JULY 2016

CHINACHANNEL.CO *CHINA IBOOKS & CHINA ITUNES CHINA DIGITAL READING MARKET DURING THE 2 QUARTERS* WHILE IBOOKS WAS OPERATING

2015 Q4 2016 Q1 35%

30% IBOOKS WAS AVAILABLE IN CHINA 25% FOR APPROXIMATELY HALF A YEAR. IT MADE VIRTUALLY NO IMPACT ON 20% THE CHINESE MARKET.

15%

10%

5%

0% IREADER QQ TIANYI TADU MIGU DUOKAN AIYUEDU QIDIAN PANDA

DATA: SOOTOO RESEARCH INSTITUTE CHINACHANNEL.CO *IBOOKS WAS FULLY OPERATED IN 15Q4 AND 16Q1 A SIMILAR STORY IN VIDEO. APPLE MADE LITTLE IMPACT.

OTHERS ONLINE VIDEO 20.25% IQIYI MARKET SHARE BY USAGE TIME, 42.3% APR 2016

YOUKU 18.10%

TENCENT VIDEO 19.33%

DATA: IRESEARCH CHINACHANNEL.CO * ITUNES MOVIE WAS SHUT DOWN IN LATE APR 2016 ICLOUD

CHINACHANNEL.CO ICLOUD USAGE IS LOW. PRICING IS OUT OF LINE WITH LOCAL CHINESE COMPETITORS

ICLOUD CHINA PRICING $18 FREE

$10

$0.8 FREE $3 5G 50G 200G 1T 2T 2T

CHINACHANNEL.CO IMAPS

CHINACHANNEL.CO MOBILE MAPS MARKET CHINA Q4 2016

OTHERS 15% SOUGOU 7.70% AUTONAVI 34.3%

TENCENT MAP 13.10%

BAIDU MAP CHINESE PLAYERS 29.90% DOMINATE THE MARKET WITH OFFERINGS TAILORED TO LOCAL TASTES.

DATA:IIMEDIA CHINACHANNEL.CO APPLE PAY

CHINACHANNEL.CO APPLE PAY LAUNCH FEB 2016

“I WOULD RATE OUR FIRST-DAY PERFORMANCE (IN CHINA) AS 1,000, IF THE FULL SCORE IS 100.”

JENNIFER BAILEY, VICE PRESIDENT OF APPLE PAY, COMMENTING ON APPLE PAY DEBUT IN CHINA

CHINACHANNEL.CO APPLE HAD AMPLE REASONS TO BE OPTIMISTIC

PARTNERED WITH CHINA UNIONPAY, CHINA’S SOLE DEBIT CARD NETWORK WITH OVER 6 BILLION CARDS AND ACCEPTED ACROSS ALL MAJOR STORES AND MALLS IN CHINA.

BACKED BY 19 MAJOR CHINESE BANKS, INCLUDING THE BIG FOUR.

3 MILLION CONSUMERS LINKED THEIR BANK CARDS TO APPLE PAY IN THE FIRST 2 DAYS, ACCORDING TO CHINA MERCHANTS BANK.

+

* CHINA BANK CARD INDUSTRY CHINACHANNEL.CO DEVELOPMENT REPORT (2017) A YEAR LATER…

0% CASH

APPLE PAY 11% UNION PAY CREDIT+DEBIT CARDS 22% ALIPAY + WECHAT PAY QR PAYMENT CODE METHODS IN PAYMENTS CONVENIENCE 67% STORES: BEIJING ZHONGGUANCUN

CHINACHANNEL.CO Data Source: 36Kr Q1 2017 SOLID UNDERSTANDING 17%

ONLY CASHIER UNDERSTANDS NO 16% COMPREHENSION 67%

CONVENIENCE STORE STAFF UNDERSTANDING OF APPLE PAY

CHINACHANNEL.CO DATA SOURCE: 36KR Q1 2017 PRIMARY PAYMENT METHODS FOR OFFLINE PURCHASES

94.1% 93.6% 89.4% 87.6% APPLE PAY CLEARLY STRUGGLING

49.5% 51.3% 38.6% 41.3% 33.0% 35.7% 29.0% 30.9%

13.0% 11.4% 9.6% 9.8%

MOBILE PAYMENT APPS (E.G. CASH DEBIT & CREDIT CARDS SMARTPHONE BUILT-IN WECHAT PAY) PAYMENT TOOL (E.G. APPLE PAY)

1ST TIER CITIES (BEIJING, SHANGHAI) 2ND TIER CITIES 3RD TIER CITIES 4TH TIER CITIES & BELOW DATA: TENCENT PENGUIN CHINACHANNEL.CO INTELLIGENCE SURVEY PLATFORM CHINESE MOBILE PAYMENT MARKET SHARE Q4 2016

SMALL PLAYERS OTHERS 7.85% INCLUDING APPLE PAY 1.03%

ALIPAY TENPAY 54.1% 37.02%

CHINACHANNEL.CO DATA: ANALYSYS IMESSENGER

CHINACHANNEL.CO REASONS WHY IMESSAGE IS HARDLY USED IN CHINA

1. NON CROSS PLATFORM: CHINA MARKET DOMINATED BY ANDROID DEVICES

2. EASY TO BE SPAMMED: BLACK MARKET IN SELLING PHONE NUMBERS A SERIOUS ISSUE IN CHINA

3. USER HABITS: LOT OF USERS CONFUSE IMESSAGE WITH SMS

OH, AND 1 MORE THING…

CHINACHANNEL.CO

TIME SPENT ON MOBILE IN CHINA

EVERYTHING ELSE 35% WECHAT 45% ACCOUNTS FOR OVER 1/3 OF ALL TIME ON MOBILE! 10% 10%

TENCENT OTHER

DATA SOURCE: QUESTMOBILE, TRUSTDATA CHINACHANNEL.CO AND HILLHOUSE ESTIMATES TIME SPENT IN WECHAT 2015 VS. 2016 2016 AVERAGE 66 MINS PER DAY

33.9% 2015 4HRS+ MORE THAN DOUBLED 2016 22.4% 20.9% 21.0% 18.1% 16.3% 13.9% 14.2% 14.4%

7.5% 6.5% 3.4%

< 10 MIN 10~30 MIN 30 MIN~1 HOUR 1-2 HOURS 2-4 HOURS 4 HOURS+

CHINACHANNEL.CO DATA: QUEST MOBILE (DEC 2016) 50% OF USERS SPEND 90 MINUTES PER DAY IN WECHAT

SOURCE: WECHAT TEAM IMUSIC

CHINACHANNEL.CO “(APPLE MUSIC) LATE TO THE (CHINA) MARKET WITH AN INFERIOR PRODUCT THAT IS OVERPRICED”

ROBERT LYONS, VISITING LECTURER AT NORTHEASTERN UNIVERSITY IN BOSTON, APR 2017

CHINACHANNEL.CO TOP MUSIC APPS IN CHINA, MAR 2017 MILLIONS OF MONTHLY ACTIVE USERS

228.95 211.43

APPLE MUSIC DOESN’T MAKE THE LIST 107.72

62.79 TOP 3 ALL OWNED BY TENCENT 14.4 14.34 11.15 7.29

DATA: QUESTMOBILE CHINACHANNEL.CO * MONTHLY ACTIVE USERS APP STORE

CHINACHANNEL.CO THE APP STORE IS APPLE’S ONLY BRIGHT SPOT IN SERVICES

CHINESE IPHONE USERS HAVE NO CHOICE BUT TO USE IT

REVENUE FROM CHINA’S APP STORE IS INCREASING FAST

CHINACHANNEL.CO DATA: APPLE GLOBAL APP STORE REVENUE YEAR OVER YEAR GROWTH

43% 43% 40% 37% 35%

29% 27% 24% 25% “APP STORE MOMENTUM IS TERRIFIC, WITH REVENUE GROWING 40% YEAR OVER YEAR TO AN ALL-TIME QUARTERLY RECORD.”

TIM COOK, MAY 2017

2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1

CHINACHANNEL.CO DATA: APPLE “STRONG PURCHASING POWER AND CULTURAL FACTORS WILL HELP CHINA ACCOUNT FOR A STAGGERING 41% OF MOBILE APP STORE CONSUMER SPEND (BOTH IOS AND ANDROID) BY 2021.”

APP ANNIE, MARKET FORCAST, 2016-2021

CHINACHANNEL.CO APP STORE REVENUE DERIVED FROM CHINA (%)

100%

80%

ALL OTHER 60% REGIONS

CHINA 40%

20%

0% 2014 2015 2016 2021E* DATA: APPLE & APP ANNIE *2021 ESTIMATES ACROSS ALL MOBILE APP STORES CHINACHANNEL.CO ALL DATA IS CALENDAR YEAR. GAMES ACCOUNT FOR THE MAJORITY OF IOS REVENUE ESPECIALLY IN CHINA.

100%

75%

NON-GAMES 50% 95% GAMES 75%

25%

0% WORLDWIDE CHINA

CHINACHANNEL.CO DATA: APP ANNIE CHINESE MOBILE GAME REVENUE

TENCENT ALL OTHER GAMING COMPANIES

49% 59% 53% ALMOST HALF OF CHINESE MOBILE GAME REVENUE COMES FROM TENCENT.

51% 41% 47%

2014 2015 2016

DATA: GPC, CNG AND IDC CHINACHANNEL.CO TENCENT FINANCIAL REPORT “WE HAD EXTREMELY STRONG SERVICES GROWTH DURING THE QUARTER (2017 Q1) IN CHINA.”

TIM COOK, MAY 2017

CHINACHANNEL.CO TENCENT’S GAME REVENUE FOR Q1 2017

CHINACHANNEL.CO Q1 2017 WAS DRIVEN PRIMARILY BY THE SMASH HIT TITLE HONOR OF KINGS

50 MILLION DAILY ACTIVE USERS

CHINACHANNEL.CO CONCLUSION:

APPLE’S CHINA SERVICES ECOSYSTEM IS VERY WEAK WHEN COMPARED WITH OTHER MAJOR MARKETS.

THE SINGLE BRIGHT SPOT SEEMS TO BE IN APP PURCHASE REVENUE FROM APPS DOWNLOADED THROUGH THE APP STORE.

WE SUSPECT MUCH OF APPLE’S STRONG CHINA SERVICE GROWTH IN 2017 IS BEING DRIVEN BY TENCENT’S MOBILE GAME CATALOG EPITOMIZED BY THEIR SMASH HIT GAME TITLE ‘HONOR OF KINGS’.

CHINACHANNEL.CO PART 2 THE TIDE OF CHINESE PUBLIC OPINION IS TURNING AGAINST APPLE

CHINACHANNEL.CO STRIKE AGAINST APPLE!

ARTICLE FROM TECH INDUSTRY INFLUENCER KESO

CHINACHANNEL.CO CHINESE NETIZENS’ COMMENTS

“ANDROID DEVICES KEEP GETTING BETTER AND BETTER, BUT I FEEL APPLE LITERALLY MAKES NO PROGRESS. SOONER OR LATER I BELIEVE ANDROID WILL EXCEED IOS”

CHINACHANNEL.CO A TRICKY RELATIONSHIP DO YOU WISH WECHAT WOULD DEVELOP THEIR OWN OPERATING SYSTEM? 20K+ RESPONDENTS

DON’T CARE 23% YES 52% NO 24%

SOURCE: KENENGBA OFFICIAL ACCOUNT CHINACHANNEL.CO ONLINE SURVEY APRIL 2017 A CONFLICT BETWEEN APPLE AND TENCENT OVER A REWARD FEATURE FOR CONTENT CREATORS LED TO INTENSE DISCUSSION ONLINE IN CHINA.

USERS CAN TIP CONTENT CREATORS VIA WECHAT WALLET WITH NO CHARGE FROM WECHAT

REWARD AMOUNTS USUALLY LESS THAN $1

CHINACHANNEL.CO APPLE DISALLOWED WECHAT TO CONTINUE USING THE FEATURE THROUGH WECHAT PAY, INSISTING THE REWARD SHOULD GO THROUGH IN-APP PURCHASE (IAP) WHICH MEANS APPLE WOULD RECEIVE 30% OF ALL REWARDS.

CHINACHANNEL.CO “FOLLOWERS WANT TO TIP THEIR FAVORED AUTHORS, NOT APPLE. BUT APPLE INSISTS TO IMPOSE 30% CUT VIA IAP* ANYWAY. THIS IS ROBBERY”

KESO, CHINESE TECH INDUSTRY INFLUENCER APR 2017

CHINACHANNEL.CO * IAP: IN APP PURCHASE AN EASY AND OBVIOUS WORK-AROUND

AFTER WECHAT’S ANNOUNCEMENT TO DISABLE THE REWARD FEATURE FOR IOS USERS, CONTENT CREATORS SIMPLY SWITCHED TO USING QR CODES TO GET AROUND PAYING THE 30% TO APPLE.

CHINACHANNEL.CO CHINESE CONTENT CREATOR’S INCOME STRUCTURE 2016

OTHER TIPPING REWARD MONEY IS SMALL CHANGE FOR TIPPING CHINESE CONTENT REWARDS CREATORS. 3.80%

ADS E-COMMERCE

CHINACHANNEL.CO DATA: IIMEDIA APPLE ESSENTIALLY SHOT THEMSELVES IN THE FOOT

1. IT MADE THEM LOOK GREEDY.

2. THEY PISSED OFF THOUSANDS OF INFLUENTIAL CONTENT CREATORS ACROSS CHINA.

3. THE CONTENT CREATORS EASILY FOUND A WAY TO AVOID USING IAP.

CHINACHANNEL.CO “I HONESTLY DON’T THINK APPLE UNDERSTANDS THE LOCAL CULTURE ENOUGH TO ACHIEVE LOCAL PENETRATION (IN CHINA)”

KITTY FOK, MANAGING DIRECTOR OF THE CHINA GROUP AT IDC, APR 2017

CHINACHANNEL.CO THE INCIDENT HAS SPARKED WIDE SPECULATION THAT WECHAT MIGHT EVENTUALLY BE DELISTED FROM THE APP STORE AS THEY INCREASINGLY COME INTO CONFLICT WITH APPLE.

CHINACHANNEL.CO CHINESE NETIZENS’ COMMENTS

“THERE’S NO WAY THAT APPLE COULD TAKE ON WECHAT IN CHINA, DELISTING WECHAT FROM THE APP STORE IS EQUAL TO APPLE KICKING THEMSELVES OUT OF CHINA. USERS WILL SWITCH TO ANDROID IN THE BLINK OF AN EYE.”

CHINACHANNEL.CO CHINESE IPHONE USERS: WHAT WOULD YOU DO IF WECHAT WAS DELISTED FROM THE APP STORE?

I'D IMMEDIATELY CHANGE TO ANDROID 26% I'D USE ANOTHER MESSENGER APP

55% I'D FIND A WAY TO JAILBREAK MY IPHONE 18%

ONLINE SURVEY 4,000+ RESPONDENTS

CHINACHANNEL.CO SOURCE: APP PROGRAM ACCOUNT INDEX CHINESE ANDROID USERS: IF WECHAT WAS DELISTED FROM THE IPHONE APP STORE…

10%

THEN I’D BE EVEN LESS LIKELY TO SWITCH TO IPHONE

I'D STILL BE INTERESTED IN POTENTIALLY PURCHASING AN IPHONE 90% ONLINE SURVEY 4,000+ RESPONDENTS

CHINACHANNEL.CO SOURCE: APP PROGRAM ACCOUNT INDEX IF YOU HAD TO CHOOSE BETWEEN WECHAT AND APPLE, WHICH ONE WOULD GO WITH? 500 RESPONDENTS

NEITHER APPLE 6% 4%

WECHAT 88%

SOURCE: AIZAIGUANGJIE OFFICIAL CHINACHANNEL.CO ACCOUNT ONLINE SURVEY IN JAN 2017 WECHAT LAUNCED ‘MINI PROGRAMS’

CHINACHANNEL.CO “APPLE DIDN’T ALLOW US TO CALL THEM APP ACCOUNTS. PERHAPS IT’S A GOOD THING.”

PONY MA, FOUNDER & CEO OF TENCENT THE LAUNCH DATE OF MINI PROGRAMS WAS DELIBERATLY TIMED…

ON JAN 9, 2017, THE 10TH ANNIVERSARY OF THE IPHONE RELEASE, WECHAT OFFICIALLY LAUNCHED MINI PROGRAMS.

CHINACHANNEL.CO APPLE APP DEVELOPER ECOSYSTEM

APP STORE SAME REVENUE SHARE WITH ENTRANCE SPLIT DEVELOPERS

DESIGN GUIDELINES PROPRIETARY SAME APPROVAL CRITERION LANGUAGE CRITERION OPERATION GUIDELINES SWIFT

CREDIT: JASON NG, YOUKENENG ACADEMY WECHAT MINI PROGRAM DEVELOPER ECOSYSTEM

WECHAT SAME REVENUE LATER SHARE WITH ENTRANCE SPLIT DEVELOPERS

WELANG DESIGN GUIDELINES PROPRIETARY SAME APPROVAL CRITERION LANGUAGE CRITERION OPERATION GUIDELINES WXML + WXSS

CREDIT: JASON NG, YOUKENENG ACADEMY CONCLUSION:

APPLE HAS BLUNDERED RECENTLY AND DAMAGED THEIR IMAGE IN CHINA. THE MOVE TO BLOCK REWARD FEATURES REVEALED THEM TO BE OUT OF TOUCH WITH THE LOCAL MARKET. APPLE’S OFFICIAL RESPONSES TO CRITICISM WERE POOR.

CHINESE USERS ARE FAR MORE LOYAL TO LOCAL PRODUCTS SUCH AS WECHAT THAN APPLE. WECHAT IS CONTINUING TO EXPAND BEYOND MESSAGING INTO DIRECTIONS THAT IN THE LONG TERM WILL PLACE IT INTO COMPETITION WITH BOTH THE APP STORE AND IOS.

CHINACHANNEL.CO PART 3 LOCAL CHINESE SMARTPHONE BRANDS INCREASING IN STRENGTH, SOHISTICATION AND LOCAL MARKET SHARE

CHINACHANNEL.CO U.S. SMARTPHONE MARKET SHARE TOP FIVE IN 2017 Q1

44.5%

IN U.S. APPLE IS GAINING MARKET SHARE OVER 28.3% ANDROID

9.8% 4.2% 2.2%

APPLE SAMSUNG LG MOTOROLA HTC

DATA: COMSCORE MOBILENS CHINACHANNEL.CO CHINA SMARTPHONE MARKET SHARE TOP FIVE IN 2017 Q1

20% THE 1ST QUARTER OF 2017 18.2% PRODUCED THE LOWEST IOS SHARE SINCE 2014. 14.1%

9.2% 9%

HUAWEI VIVO APPLE XIOAMI

DATA: IDC QUARTERLY CHINACHANNEL.CO MOBILE PHONE TRACKER IPHONE SALES MARKET SHARE IN CHINA IS SHRINKING FAST

Q2 2016 Q3 2016 Q4 2016 Q1 2017 30%

-8.0%

20% -2.2% -4.8% -8.7%

10%

0%

PREVIOUS YEAR CURRENT YEAR

-10% CHINACHANNEL.CO DATA: KANTAR WORLDPANEL “(CHINESE CUSTOMERS) TIRE OF LAST YEAR’S, OR EVEN LAST MONTH’S, MODEL. ONE OF APPLE’S PROBLEMS IN CHINA IS ITS PRODUCT REFRESHES… OR LACK THEREOF.”

BRYAN MA, TECHNOLOGY INDUSTRY ANALYST AT IDC, AUG 2016

CHINACHANNEL.CO CHINA IS JAMMED FULL OF LOCAL COMPETITORS

CHINACHANNEL.CO TOP 5 SMARTPHONE VENDORS’ MARKET SHARE IN CHINA: 2011-2016 25%

20% 2012 APPLE LED THE PACK 15%

10.80% 11% 13.60% 9.60% 10% 9.20% 8.80% 7.30% 5%

0% 2011 2012 2013 2014 2015 2016 Q1 17

CHINACHANNEL.CO DATA: IDC QUARTERLY MOBILE PHONE TRACKER TOP 5 SMARTPHONE VENDORS’ MARKET SHARE IN CHINA: 2011-2016 25%

2017 Q1 LOCAL BRANDS 20.00% 20% ARE RACING AHEAD

16.40% 14.60% 15%

10.60% 9.30% 9.70% 10% 8.40%

5%

0% 2011 2012 2013 2014 2015 2016 Q1 17

CHINACHANNEL.CO DATA: IDC QUARTERLY MOBILE PHONE TRACKER XIAOMI’S RAPID RISE AND FALL STUNS MANY

XIAOMI TOPPED THE MARKET FROM NOWHERE AFTER ONLY 15.10% 2 YEARS OPERATION THE XIAOMI MIRACLE BLOOMED. 12.40%

8.90% LAUNCHING THEIR 1ST MODEL IN OCT 2011, XIAOMI WAS NOT A MAINSTREAM VENDOR 5.30% BACK IN 2012-2013. 2016 SAW A SUDDEN DROP 3% FROM THE TOP SPOT. THE XIAOMI MIRACLE STALLS IN JUST 2 YEARS. 0.40%

2011 2012 2013 2014 2015 2016

DATA: IDC QUARTERLY CHINACHANNEL.CO MOBILE PHONE TRACKER IPHONE RETENTION RATES (%)

CHINA RATES MUCH LOWER THAN ALL 92 89 89 OTHER REGIONS 89 86 87 86 85 83 79 78 74 74 70

57

US UK CHINA GERMANY JAPAN Q4 2015 Q2 2016 Q4 2016

RETENTION RATE = BRAND’S USERS UPGRADING THEIR PHONES WITHOUT CHANGING TO ANOTHER BRAND / TOTAL DATA: UBS EVIDENCE LAB NUMBER OF BRAND’S USERS UPGRADING PHONES CHINACHANNEL.CO SMARTPHONE BRAND LOYALTY CHINA MARKET BRAND RETENTION RATE (%) 80 2016 70 67 BIG DROP IN APPLE 2015 LOYALTY LAST YEAR 60 50 50 SIGNIFICANT GAINS FOR 2 LOCAL BRANDS 40 36 33 32 29 30 29 30 30 28 23 22 19 19 20 16 17 14 14 10 10 10

0

RETENTION RATE = BRAND’S USERS UPGRADING THEIR PHONES WITHOUT CHANGING TO ANOTHER BRAND / TOTAL NUMBER OF BRAND’S USERS UPGRADING PHONES CHINACHANNEL.CO DATA: TOUTIAO HUAWEI IS THE NUMBER 1 BRAND CHINESE IPHONE USERS DEFECT TO

1 HUAWEI 25%

2 SAMSUNG 17.7%

3 XIAOMI 15.1%

4 OPPO 14.4%

5 VIVO 14.2%

DATA: TENCENT PENGUIN INTELLIGENCE CHINACHANNEL.CO SURVEY PUBLISHED JUN 2016 LOCAL PLAYERS HAVE BIG AMBITION “WE HOPE THAT IN 3 YEARS (2019) OUR MARKET SHARE CAN BE TOP 2 AND IN 5 YEARS (2021) OUR MARKET SHARE CAN BE TOP 1.”

RICHARD YU, HEAD OF HUAWEI CONSUMER DIVISION, FEB 2016.

CHINACHANNEL.CO MANY HUAWEI PHONES ARE NOT CHEAP!

HUAWEI MATE 9 PORSCHE DESIGN

TYPICAL CHINA RETAIL PRICE $1,300 USD (8,999 RMB)

EXCHANGE RATE: CHINACHANNEL.CO 1 CHINESE YUAN = 0.15 DOLLARS “PEOPLE LOVE OUR HIGH END SMARTPHONES, AND WE CAN’T WAIT TO TAKE ON DIRECT COMPETITION WITH APPLE (GLOBALLY)”

RICHARD YU, HEAD OF HUAWEI CONSUMER DIVISION, NOV 2016

CHINACHANNEL.CO TOP 3 SMARTPHONE VENDORS GLOBAL MARKET SHARE 2012-2016 35%

30%

25% SAMSUNG

21.2% 20%

APPLE 15% 14.6%

HUAWEI 10% 9.5%

5%

0% 2012 2013 2014 2015 2016

DATA: IDC QUARTERLY CHINACHANNEL.CO MOBILE PHONE TRACKER LOCAL PLAYERS HAVE BIG AMBITION “OPPO IS LARGELY UNKNOWN IN THE WESTERN WORLD, BUT ITS BRAND IS WILDLY POPULAR IN CHINA AND GROWING RAPIDLY ACROSS INDIA.”

NEIL MAWSTON, EXECUTIVE DIRECTOR AT STRATEGY ANALYTICS

CHINACHANNEL.CO OPPO’S FLAGSHIP MODEL

OPPO RS9

TYPICAL CHINA RETAIL PRICE $405 USD (2,799 RMB)

NEVER HEARD OF IT? CHECK OUT THE NEXT SLIDE…

EXCHANGE RATE: CHINACHANNEL.CO 1 CHINESE YUAN = 0.15 DOLLARS BEST SELLING PHONE MODELS WORLDWIDE Q1 2017

6.1% OPPO R9S IS THE NO. 3 BEST 4.9% SELLING SMARTPHONE MODEL GLOBALLY!

21.5 2.5% 17.4 1.7% 1.4% 8.9 6.1 5.0

IPHONE 7 IPHONE 7 PLUS OPPO R9S SAMSUNG GALAXY SAMSUNG GALAXY J3 J5

UNITS SOLD (MILLIONS) DATA: STRATEGY ANALYTICS ABSOLUTE MARKET SHARE (%) CHINACHANNEL.CO WHY ARE SO POPULAR? THE SECRET SAUSE

CHINACHANNEL.CO MARKETING SLOGAN

“5 MINUTES CHARGING FOR A 2 HOURS PHONE CALL”

REACHING CONSUMERS’ PAIN POINTS IN AN EASY TO UNDERSTAND AND REMEMBER WAY.

A PHONE WITH NO POWER IS A CHINESE CONSUMER’S WORST NIGHTMARE.

INTENSE TV AND METRO ADVERTISING CAMPAIGN.

CHINACHANNEL.CO SELFIES***

********

CHINACHANNEL.CO OPPO’S COMMISSION SYSTEM INCENTIVIZES BOTH DISTRIBUTORS AND SALES STAFF TO STAY HIGHLY MOTIVATED, ENHANCING THE IN-STORE EXPERIENCE.

CHINACHANNEL.CO OPPO SPENT A FORTUNE TO UPHOLD ITS BRAND. SIGNING UP A-LIST STARS AND SPONSORING POPULAR TV SHOWS, OPPO IS PERCEIVED AS A PREMIUM BRAND, ESPECIALLY IN CHINA’S DEVELOPING AREAS.

CHINACHANNEL.CO OPPO HAS 200,000+ DISTRIBUTION STORES IN CHINA OFFLINE STORES CONTRIBUTE 90%+ SALES

CHINACHANNEL.CO APPLE OPERATES 40 CHINA APPLE STORES

CHINACHANNEL.CO APPENDIX APPLE OFFICIAL DATA FOR CHINA

CHINACHANNEL.CO APPLE REVENUE GROWTH BY REGION Q1 2017 20%

11% 10%

5%

REST OF ASIA AMERICAS EUROPE JAPAN GREATER CHINA PACIFIC

-14%

CHINACHANNEL.CO DATA: APPLE INC. APPLE GLOBAL GROWTH BY REGION

112%

99% CHINA ALL OTHER REGIONS 71% 70%

2014 2015 2016 2017

28% 14%

1% -14% -12% 5 CONSECUTIVE -26% -30% QUARTERLY REVENUE -33% DECREASES YEAR ON YEAR

CHINACHANNEL.CO DATA: APPLE INC. YEAR ON YEAR REVENUE GROWTH APPLE REVENUE BY REGION Q2 2017

REST OF ASIA PACIFIC 7% JAPAN 9%

AMERICAS 40% GREATER 20% CHINA

24%

EUROPE

CHINACHANNEL.CO DATA: APPLE INC. CONCLUSION:

APPLE IS UNQUESTIONABLY DOING VERY WELL GLOBALLY BUT CHINA POSES A TOTALLY DIFFERENT PICTURE. CHINESE SEE THE IPHONE AS A LUXURY PHONE RATHER THAN AN ECOSYSTEM, WHICH MAKES IT MUCH HARDER TO LOCK THEM IN. THIS IS REFLECTED IN POOR CHINA IPHONE RETENTION RATES.

APPLE’S SERVICES ECOSYSTEM IS WEAK WITH REVENUE GROWTH MOSTLY BEING DRIVEN BY A 30% CUT FROM IN APP MOBILE GAME PURCHASES THAT ARE DEVELOPED BY LOCAL PLAYERS SUCH AS TENCENT.

THE PERCEPTION OF APPLE’S BRAND IS SHIFTING, THEY ARE INCREASINGLY BEING PERCEIVED AS ANTI-INNOVATORS: A COMPANY ABUSING THEIR PRIVILEGED POSITION OF POWER TO BULLY OTHERS.

LOCAL SMART PHONE BRANDS ARE CLOSING THE GAP THROUGH BETTER AND BETTER HARDWARE TOGETHER WITH EXCEPTIONALLY STRONG MARKETING AND SALES.

WE CAN STILL FORESEE A SALES SURGE ON THE RELEASE OF THIS YEAR’S HOTLY ANTICIPATED NEW ANNIVERSARY IPHONE. HOWEVER, IF THIS HARDWARE CENTRIC BUSINESS PATTERN DOESN’T CHANGE, CONTINUED TURBULENCE IN CHINA FOR APPLE IS A CERTAINTY.

CHINACHANNEL.CO THIS REPORT WAS PREPARED BY CHINA CHANNEL

SAMIN SHA SENIOR ANALYST AT CHINA CHANNEL

SAMIN PREVIOUSLY HELD POSITIONS AT HUAWEI INTERNATIONAL MARKETING AND LATER AT ANWO, ONE OF CHINA’S LARGEST CHINESE MOBILE AD PLATFORMS. WITH 10+ YEARS OF CHINA INTERNET INDUSTRY EXPERIENCE SAMIN HEADS UP RESEARCH AT CHINA CHANNEL.

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