Apple and Google Fall Behind in China

Google (NASDAQ: GOOG) and Apple (NASDAQ: AAPL) are the leaders of the consumer technology sector in the U.S. One dominates search and mobile OS, the other digital content, smartphones and tablet PCs. Neither has been able to extend its dominance in China. As a matter of fact, each faces increasing trouble there, which could badly damage their global fortunes.

Google’s market share in search has run well behind local search firm Baidu (NASDAQ: BIDU). Proof that the gulf has widened came as Baidu announced earnings. It reported an extraordinary fourth-quarter revenue growth number — up 83% to $710 million. Net income rose 77% to $326 million. The net income margin was particularly telling. Baidu’s leverage on relatively fixed expenses is unusually large. Its financial strength and plans to aggressively expand into the mobile business will allow it to push Google further and further behind in the Chinese internet market.

Apple’s problems in People’s Republic are at least twofold. New research from Gartner shows that the U.S. company dropped to the fifth position in China. That market share in the final quarter of 2011 was 7.5% compared to 10.4% in the previous quarter. Arch rival Samsung gained share, as did local firms Huawei and ZTE. Apple also has gotten into trouble due to a trademark dispute with local hardware company Proview. The dispute has caused many vendors to stop the sales of iPads in some regions of the country.

Google’s problems in China are longstanding and have been exacerbated by fights with the central government over privacy and censorship. Apple’s problems are more recent, but at least as troubling. Apple has stated several times that China is critical to its growth. As Apple’s market share grows in the U.S. and Europe, it will naturally slow. China is the largest market for wireless subscribers. Apple cannot fuel its rapid revenue growth without significant success there.

Google and Apple have faced a large number of challenges in their home market, which range from IP suits to questions about their use of customer data. These are nearly inconsequential compared to their problems in China.

Douglas A. McIntyre