After a number of regulatory hurdles, Apple finally launched the iPhone 5 in China on December 14th. The launch should help shore up Apple’s market share in the region, which dropped to the sixth place last quarter as people deferred purchasing an iPhone in anticipation of the new release.  The huge pent-up demand was evident as Apple’s oldest carrier partner in the country, China Unicom (NYSE:CHU), racked up more than 300,000 bookings for the iPhone 5 in the first week that the popular smartphone was made available for pre-order. With China Telecom (NYSE:CHA) also launching the iPhone 5 in China, Apple’s holiday quarter results should receive a much-needed late boost, having negotiated through a supply crunch in the earlier part of the quarter.
A deal with the largest wireless carrier in the world, China Mobile, however remains elusive until Apple can work out a subsidy deal with the carrier. How soon that will happen is open to speculation considering the Chinese government’s possible opposition to the huge iPhone subsidies. (see Apple’s China Potential Could Be Limited By A Subsidy Compromise With China Mobile) But knowing that the carrier’s 3G growth has been hurting due to unavailability of the iPhone, such a deal should not be too far along. This deal is very important for Apple as it can instantly double the iPhone’s current addressable market in China and act as the next big boost to its stock given that the iPhone accounts for around 55% of the company’s stock value currently. (see Apple Can Ride China Potential Past $800 With China Mobile’s Support)
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Apple’s China story
Despite not having a China Mobile deal, Apple hasn’t performed too badly in China so far. Revenues from greater China, which includes mainland China, Hong Kong and Taiwan, in the September quarter grew 26% year-over-year and accounted for 15% of Apple’s revenues for the fiscal year. This brought Apple’s FY2012 revenues from the region to about $24 billion, about 80% growth over FY 2011.
China is indeed a huge opportunity for Apple considering that the country has already overtaken the U.S. as the world’s largest smartphone market by volume. This is an incredible statistic considering that China is only in the early stages of smartphone adoption. 3G penetration in China stands at only about 20% currently and is growing strongly. Considering the huge 2G subscriber base that the Chinese carriers are looking to upgrade to 3G, the potential for Apple to ride the boom is huge. Demand for the newly launched iPhone 5 has so far been strong and China’s addition this holiday season will help boost what has seasonally been Apple’s strongest quarter further.
As the country grows and the average Chinese sees an increase in buying power, we expect to see a growing shift in demand from 2G to 3G smartphones. The iPhone can help Apple tap this phenomenal growth in demand. Even Apple’s CEO Tim Cook acknowledged the immense potential that China presents when he said during the Q2 earnings call that the country was Apple’s “fastest growing region” by far and that the company was doing everything it could to market its brand in China.
Penetrating China could however mean margin pressures as the company negotiates carrier subsidies with China Mobile and competes with the increasingly popular Android phones. With cheap Android smartphones seeing huge demand and the pricing war gradually dragging prices down to sub-$100 levels, Apple will do well to avoid this segment for as long as it can without sacrificing growth. It therefore bodes well that Apple is only just getting started in China and has ample opportunity to drive sales in the country without having to drop prices anytime soon.Notes:
- IDC: Apple slipped to sixth in China smartphone share in Q3, Samsung and locals sat on top, Engadget, December 6th, 2012 [↩]