China’s VAT down lets Apple cut iPhone price further

The Chinese government last March approved a package of measures to address the slowdown in its economy. As part of that plan, VAT on consumer products has been reduced from 16% to 13%, affecting Apple’s products along the way. Caixin Global, a news portal about the country in English, echoes this change that Apple has taken advantage of to lower the price of the iPhone.

A cheaper iPhone in China thanks to taxes and exchange rate

This is the first time Apple has adjusted the price of iPhone in China in its stores mid-cycle. As we’ve seen, the price drop on the latest iPhone model is around 600 yuan on models like the iPhone XR. This decrease is higher than it would be due to the simple tax drop. Specifically:

• 64GB iPhone XR before price drop: 4,829 yuan.

• 64GB iPhone XR after price drop: 4,229 yuan.

The change from 16% to 13% would mean a reduction of 125 yuan, but Apple has decided to reduce it further. The reason is in exchange rates. According to Apple CEO Tim Cook, at the last results conference, he said the company was willing to lower the price of the iPhone in some regions because the exchange rate was unfavourable.

In fact, what we did in January in some locations and in some products is essentially absorbing some or all of the exchange rate movement compared to last year, approaching or putting the same local price a year ago – Tim Cook at the exchange rate conference January 2019 shareholders.

According to Cook, the exchange rate between the dollar and currencies in some countries and regions meant a price hike on the iPhone. The CEO said in early 2019 that they hoped to adjust the price to an exchange rate more proportional to last year’s prices. Apple reportedly began to cut the price from the country’s authorized retailers in January this year and needed to adjust them in its official store.

iPhone problems aren’t solved with price drops

In recent months there has been a lot of talk about a price drop on the iPhone as a supposed universal solution to iPhone problems. But it’s a wrong recipe because it doesn’t address the causes that generate it. The smartphone market as a whole is plunged into a phase of maturity, stagnation and sometimes slight recoil.

In addition, the Chinese economy is on the doorstep of an economic crisis, hence the government has developed a reactivation plan that includes tax cuts to stimulate consumption. Both impact Apple to a greater or lesser extent, as do other brands.

Will this price drop help increase iPhone sales? Undoubtedly. But it doesn’t face the real reasons that have led to a reduction in sales in China: increased software support and hardware durability extending its lifecycle. Users no longer renew their terminals as often as before because they have reached a point where they hold up well longer (to the point where their durability belies the so-called programmed obsolescence).

Moreover, the improvements that bring generation after generation are not as obvious a leap as it once did. For example, in the move from iPhone 3GS to iPhone 4. Previously, these changes attracted new users and encouraged old ones to renew frequently. Now there are hardly any switchers to sell an iPhone to because everyone who wants one, is likely to already have it. This is as soon as the demand for the iPhone is more inelastic than a normal good, causing a price drop to increase only slightly the number of units sold.

With the context in mind, falling prices in China will help slightly improve sales, but it will at Apple’s margins. Perhaps that’s what’s most surprising, that Apple is willing to take an impact on the gross margin to alleviate the drop in demand.