Apple (NYSE:AAPL) is set to expand its iPhone footprint in China with its new deal with China Telecom (NYSE:CHA) to sell the iPhone 4S starting March 2012. China’s third largest wireless carrier behind China Mobile (NYSE:CHL) and China Unicom (NYSE:CHU) will start taking online pre-orders for the phone from March 2 and will likely start sales from March 9.  With close to a billion mobile subscribers and a very low 3G penetration, China presents a huge opportunity for Apple. But it will have to first contend with cheaper, low and mid-tier smartphones from strong local rivals such as ZTE. Our $550 price estimate for Apple stock is about 7% ahead of the current market price.
iPhone 4S Launch to Help Apple Gain Share
- How Many Apple Watches Did Apple Sell Over The Holiday Quarter?
- How Apple Continues To Post Robust Margins Despite Slowing Sales, Currency Headwinds
- Apple Q1 Preview: Has The iPhone Peaked?
- Should Apple Double Down On Share Buybacks?
- What Makes The iPhone 2.5x As Valuable As Apple’s Other Product Lines?
- Can An Apple Car Add 5% To Apple’s Earnings By 2022?
The low and mid-tier smartphone market is seeing strong growth in China as these phones are not only affordable for the end-customers, but they are also a benefit for the carriers that subsidize the phones in a bid to get customers to sign up for a long-term postpaid plan. (see Chinese Telcos Get Fat Margins Selling Cheaper Smartphones)
During the October-December period of 2011, when Apple had no carrier deals to sell the iPhone 4S in China, its market share dropped to 7.5%, and its market position was overtaken by ZTE.  The launch of the iPhone 4S on China Unicom’s network in January and now on China Telecom’s network should help Apple claim some of the lost ground. (see Apple Can Expand Addressable Market by Selling iPhone through China Telecom)
China Mobile Remains the Final Frontier
However, the biggest opportunity lying ahead is a deal with China Mobile, the largest wireless carrier in the world with over 600 million subscribers. In size, it not only dwarfs its U.S. counterparts, Verizon and AT&T, but also its Chinese rivals, China Unicom and China Telecom, by close to 3 and 6 times, respectively.
China Mobile however doesn’t have a 3G network that the iPhone currently supports. The company is testing its TD-LTE 4G network, and if the next iPhone is LTE compatible, we may see the next generation iPhone launch on China Mobile. Even so, we do not see that deal happening anytime soon unless Apple chooses to develop an iPhone that runs on China Mobile’s proprietary 3G network.
Meanwhile, China Telecom’s margins will take a hit as the carrier aggressively promotes the iPhone through marketing spend and subsidies. The subsidies will however pay off in the long run by ensuring long-term patronage for its higher margin postpaid data plans, thereby reducing churn and bringing in steady cash flows. The iPhone users are typically heavy data users as well, which means that the average revenues generated per user will also increase, making the near-term loss of profitability worthwhile.Notes:
- Apple to Offer iPhone Through Second Chinese Carrier, WSJ, February 20th, 2012 [↩]
- Apple’s iPhone loses China market share, Reuters, February 17th, 2012 [↩]