China Passes the U.S as the Largest Smartphone Market; Apple Poised for Huge Gains

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China has leapfrogged U.S. to be the world’s largest smartphone market by volume, according to latest Q3 figures released by Strategy Analytics. Around 24 million smartphones were shipped to operators and retailers in China last quarter as opposed to 23 million units shipped in the U.S. market. China shipments grew by 58% while the U.S. shipments fell by 7% quarter-over-quarter, according to the report. [1] The growing Chinese demand is an indicator of where mobile phone manufacturers such as Apple (NYSE:AAPL), Samsung, Nokia (NYSE:NOK), Research in Motion (NASDAQ:RIMM) and others will be seeing most of their sales growth in the coming years.

Nokia had the largest share of the market, ahead of both Samsung and Apple. However, we believe that since China Unicom (NYSE:CHU) is the only carrier that sells the iPhone in China currently, Apple sees a greater potential for growth in this market as it adds more carriers to the fold.

We maintain a price estimate of $502 for the Apple stock, which is about 35% above market price.

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See our complete analysis for Apple stock here

iPhone market share set to rise

According to the Strategy Analytics, although China saw more shipments, the U.S still remains the largest smartphone market by revenue. This means that on an average, the average pricing for smartphones in more in the U.S. than China.

While this is understandable considering that there is a wide disparity of income per capita between the two nations, as more consumers in China, or for that matter any emerging nation, see an increase in buying power as the country develops, the demand for smartphones will increase exponentially. Even Apple’s CEO Tim Cook acknowledged the immense potential that China presents when he said during the recent earnings call that the country was Apple’s fastest growing region by far and the company was doing everything it could to market its brand in China.

Currently, Apple charges more in China for an iPhone than it does in the U.S. market. Apple sells a basic model of an unlocked iPhone 4 for $599 in the U.S. but it charges CNY 3998 for the same in China which translates to $626 roughly. However, this is because Apple is only in the very initial stages of penetrating the Chinese market, which means that the iPhone is being adopted only by the very affluent and well educated tech-lover.

Margins may be hit when Apple enters China aggressively

However, as smartphones see mass-adoption, Apple will not be able to price its smartphones on the higher-end as it does in developed markets and will hence have to take a hit on their margins; however, the sheer number of sales in the world’s most populous nation will more than make up for the comparatively small loss in profit per unit. Also, as more Chinese telecom companies, such as China Mobile and China Telecom, jump in on the opportunity to tap the growing demand for data-intensive plans that iPhone users are likely to use, they will try and subsidize the smartphones for their consumers in return for long-term contracts. This has helped Apple protect its margins in the U.S., where it charges almost $650 per iPhone 4S from the carriers who then subsidize and sell it for $199 to the end-user.

The iPhone has been available in China since 2009 through China Unicom and it is likely that China Telecom launches the iPhone 4S on its CDMA network early next year. China Mobile has also been in talks to launch the iPhone in China. [1] If these talks materialize, Apple could be looking at a huge market share gain next year.

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Notes:
  1. China in Smartphone Lead, WSJ, November 24th, 2011 [] []