In a move that shows that Apple (NASDAQ:AAPL) is getting aggressive about increasing its reach in the Chinese market, the company has started offering credit on devices bought on its China online store.  The credit offer is applicable on purchases made between 300 RMB and 30,000 RMB ($48-$4,800), but only with a credit card from China Merchants Bank. Additionally, the credit is interest free, if the consumer is willing to pay back the installments within a year. However, credits longer than a year will carry interest rates of 6.5-8.5%, depending on the length of the payback period.
While the installment service runs only through January 23, it is quite possible that Apple is running this as a test for a full-fledged credit facility in the future. Such a move would help Apple make its expensive products more accessible to a big chunk of the Chinese market they are currently not accessing. It would also be an effective utilization of Apple’s huge cash hoard, and help it counter the growing threat from the burgeoning number of cheap Android devices flooding the emerging markets.
Expensive Devices Reduce Apple’s Reach
Android’s growing reach in China saw Apple’s market share drop to the sixth in the country in Q3 2012. While a big reason for that may have been customers deferring their purchases until the launch of the latest iPhone 5 last month, the iPhone’s expensive pricing does reduce its addressable market in China. The iPhone 5 is priced at about 5300 RMB ($850) in China, almost 50% more than what an average urban Chinese customer earns in a month. While carrier subsidies do make it more palatable for the Chinese by reducing their monthly bill through credits, the subscribers are expected to pay an upfront deposit that’s sometimes more than the retail cost of the iPhone, which reduces the effectiveness of the subsidy significantly. Moreover, the biggest wireless carrier in the region, China Mobile, which has close to 65% of the subscriber base is yet to sign a subsidy contract with Apple to sell the iPhone.
Still, despite the aforementioned handicaps, 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. The iPhone 5 launch last month, saw opening weekend sales of over 2 million, making it its best ever launch in the country.
Possible Strategies For China
The smartphone market in China is growing in leaps and bounds and will in all likelihood have surpassed the U.S. as the largest smartphone market by volume in 2012. This is an incredible statistic, given that 3G penetration in China stands at only about 20% currently. 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. However, Apple will have to explore ways to make its expensive devices more accessible to at least the mid-range consumer market in order to make the most of the China potential. Using its huge cash balance, a large chunk of which is stashed outside the U.S., to finance Chinese iDevice sales is one way. But it also risks setting a precedent for carriers in the developed markets to stop relying on the subsidy model as much to drive iPhone sales.
Another strategy, of which there have also been rumors, is for Apple to consider a cheaper iPhone. While we think such a move may dilute Apple’s brand and prove counterproductive in the developed markets, doing so for the emerging markets without compromising much on the build quality and margins, in a move similar to the iPad mini, may be a good idea. This will also help decrease the per phone subsidy costs and potentially bring aboard China Mobile, which has concerns over the high iPhone subsidies and wants to negotiate a better ‘benefit-sharing agreement with Apple. (see Apple’s China Potential Could Be Limited By A Subsidy Compromise With China Mobile)Notes:
- Apple Lets Buyers on China Web Pay in 2-Year Installments, Bloomberg, January 16th, 2012 [↩]