The top three reasons Apple still loves China (AAPL)

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Apple's first-quarter earnings report sent the stock tumbling, but the tech giant has a plan for future growth.

Apple CEO Tim Cook said earlier this week that the company is excited about China's potential as a key growth market despite slowing consumer spending, according to the Los Angeles Times.

The company reported its first year-over-year decline in iPhone shipments in its Q1 2016 report, which included an 11% YoY decline in sales in Mainland China.

Greater China, which includes Mainland China, Hong Kong, and Taiwan, is Apple's second-most significant region after the Americas with 25%, or $12.5 billion, of the company's total revenue in Q1 2016.

China still represents massive potential for Apple for three reasons. First, the tech giant is well positioned there, as Apple generated $58 billion in revenue from Greater China in fiscal 2015. This was more than any other business in the world's most populous nation, according to Cook.

Second, consumers are jumping ship from Android to Apple. The number of Chinese iPhone users who had owned an Android device as their latest smartphone climbed 40% in the six-month period from September 2015 to March 2016.

Finally, China's middle class is expanding rapidly. This group contained 50 million people in 2011, but that number is expected to swell to 500 million by 2021. The middle class is a crucial segment for smartphone manufacturers, especially Apple because it markets itself as a luxury brand in the nation.

However, there are still several hurdles Apple must overcome in China. Chief among those is the nation's government recently ordered the shutdown of iBooks Store and iTunes Movies within China's borders. Apple is working with China to alleviate any concerns.

This is still a bit problematic, however, because Apple has fostered a healthy relationship with the Chinese government, which has not been so friendly to other American tech companies.

Apple definitely needs to tap into this expanding middle class, as the global smartphone market is expected to slow considerably over the next few years. Despite a record-setting holiday quarter, 2015 was likely the last year of double-digit growth for smartphone shipments.

Mature markets were at the heart of this year’s deceleration. Adoption has reached new highs in key markets in the United States, Europe, and China. The pool of first-time buyers in these countries is shrinking rapidly, and sales are now primarily coming from phone upgrades.

Meanwhile, emerging markets will continue to see robust shipment growth. India and Indonesia, in particular, will help fuel a large share of the shipments growth within the global smartphone market over the next few years.

Will McKitterick, senior research analyst at BI Intelligence, Business Insider's premium research service, has compiled a detailed report on smartphones by country that forecasts the market through 2021 to reflect slower, stabilizing growth in the long term.

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Here are some key points from the report:

• The global smartphone market is still growing at a steady pace due to more widespread adoption in emerging markets. We estimate the global market will hit about 2.1 billion units shipped in 2021.
• Shipments growth over the past few years has been driven by the falling price of smartphones, which has made handsets more accessible in emerging markets. The average selling price of a smartphone in India nearly halved between 2010 and 2015.
• With relatively low smartphone penetration, we forecast Indian smartphone shipments to grow rapidly over the next five years. Nevertheless, India has a long way to go before it surpasses China as the world’s leading market for smart handsets. India is estimated to account for roughly 10% of the global smartphone market in 2016, considerably less than China’s 30% share.
• The global platform wars are over, even as smartphone adoption continues to rise across various markets worldwide. Android and iOS are estimated to account for 97.3% of global platform market share in 2015, compared to 96.3% last year.
• Apple closed the year with another strong quarter on the back of its iPhone 6s and iPhone 6s Plus launches. Still, the vendor saw a slight decline in YoY growth of its share of the market in the face of stiff competition from Samsung and Chinese vendors such as Huawei.

In full, the report:

• Forecasts global smartphone shipments through 2021.
• Explores why India is the next high-growth smartphone market.
• Breaks down the global smartphone platform wars.
• Discusses smartphone vendor performance market share.

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