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Apple takes $2.2bn hit as Chinese resellers snub iPhone 4S

CEO Cook swept out by flooded channel

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iPhone supreme leader Tim Cook said Apple's $2.2bn revenue fall in China this quarter was caused by Cupertino flooding the distribution channel with unwanted stock.

Sales in the authoritarian regime tumbled from $7.9bn in Q2 to $5.7bn in Q3, a 27 per cent drop although they were up 48 per cent year-on-year.

While defending Apple's performance in China during in a phone call with investors yesterday, Cook said demand from resellers in the channel had nosedived. Sales to punters had remained healthy, Cook said, adding:

Virtually all of the $2.2bn sequential revenue decline was due to iPhone sales in Greater China. About half of that $2.2bn is attributable to changes in the channel inventory not the underlying sell through of the iPhone.

Given the small number of official Apple stores in China, relative to the size of the population, the distribution channel to ordinary shops is important in the country. The iPhone 4S launched in China in Q2 and the roll out was fast: Apple flooded the market with stock and Q3 saw an inevitable pull-back in demand. Cook said:

We increased the channel inventory to accommodate the sale and to reach our target inventory of four to six weeks. The remainder of the sequential revenue decline is mainly attributable to normal seasonality after the very successful iPhone 4S launch.

Channel inventory figures only count stock destined for resellers: it doesn't include stock bound for Apple's retail stores or sold through the Apple website.

In the call Cook explained that, globally, Apple tightened its inventories following the roll-out of the iPhone 4S:

We were also able to get the channel within our target inventory range of four to six weeks by the end of March, and so what that did was it increased sell-in over sell-through by 2.6 million units. In the quarter that we just finished, our sell-in was less than sell-through by 300,000 units. So the net change in channel inventory across the quarter is about 3 million units. So, I think it's important to understand that to look at the underlying sell-through trend.

Cook also stated that Apple never includes its sold-to-channel stock in its gross sales numbers. ®

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