There are challenges to Apple moving into China, but this country is Apple's next great revenue source. I believe its two greatest challenges are Android's market share and the relationship with China Mobile (CHL) Apple is still courting. Despite these, Apple needs China to grow. Can it gain a foothold? I believe the level of Apple's success depends on its relationship with China Mobile and the launch of the iPhone 5.
Betting on the iPhone 5 Launch
Attempting to bolster its revenue the last quarter of the year, Apple (AAPL) is hoping to launch its iPhone 5 in China before year's end. Imagine what this can do for Apple. Presently, the iPhone accounts for close to 55% of the company's stock value. Two carriers in China will already distribute the phone (China Unicom & China Telecom), but Apple is courting the much larger China Mobile. It is the world's largest wireless carrier by subscriber base with close to 700 million wireless subscribers-but a huge chunk is still on 2G.
China Mobile's wireless market share in China is 65% while its 3G customers account for only 38% of the market. The company claims its 3G growth has lagged because the iPhone was unavailable. As I have written, both smaller rivals (China Unicom (CHU) and China Telecom (CHA)) offer iPhones already and coincidently both are growing 3G subscribers at faster clips than China Mobile. For this reason, the probability of a joint venture looks promising.
It is the development of the iPhone 5 that will be able to make this happen. Trefis Team wrote this in its study about Apple and a relationship with China Mobile:
"China Mobile presents Apple with an immense opportunity to tap China's burgeoning smartphone market. However, a deal with China Mobile required Apple to come out with a specially crafted iPhone for the carrier's proprietary network, which proved to be a huge deterrent for the two giants to come together. All that may change however with the iPhone 5… The chip-set co-incidentally also supports China Mobile's 3G network, paving the way for the long awaited deal between Apple and China Mobile."
Apple needs China
If the company is going to fight the slump it is in; it needs this frontier to push itself to new highs. China, by volume, is the largest smartphone market in the world. Presently it has a huge 2G market while the 3G market only has a 19% penetration level so far. So as carriers convert customers to 3G from 2G, Apple could surf the profits on this wave for a while. Here are Apples statistics for the region:
- Revenues from greater China, which includes mainland China, Hong Kong and Taiwan, in the September quarter grew 26% year-over-year.
- They 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.
Even Tim Cook has previously acknowledged that China is the company's fastest growing market. The evolution from 2G to 3G in the country can really boost Apple's value if it is positioned correctly. Even though China Mobile does not sell the iPhone, it has millions of iPhone users on its network presently. It has consistently brought 1.25 million iPhone users to its network each month. If it can average that in new iPhone 5 sales starting in December, it will sell almost 20 million iPhone 5 through 2013. A few years down the road and suddenly there could be 150+ million iPhones being used in China. That could generate quite a revenue stream.
RBC Capital Markets analyst Amit Daryanani thought that Apple may be able to sell 16 million phones the first year also. As I said before, China Mobile has 700 million customers, but I did not mention 75 million on its 3G network presently. If Apple could plug in here, revenue will rise, profits will rise and dividends will rise.
Apple in China is not without Challenges
China could be a different beast for Apple because of Android's foothold 90.1% stronghold in the Chinese market already. How did Android come about this type of success? It's a matter of price difference. According to Analysis International, the average price of an iPhone in U.S. dollars in China is $725.25 while the price of an Android is $223.36. That's one third the price. It makes perfect sense that a mid level Android would be the phone of evolution in China as consumers purchase their first "smartphone" as an upgrade from what they now have. Many of these phones may not be on the high end as an iPhone, but it will certainly be a challenge for Apple gaining footholds in a market familiar with Androids. The country is large enough that I am sure Apple will be just fine and build a clientele list of millions. But it is moving into a market of Android country.
Don't think for a moment Android doesn't offer high end phones on the same level as the iPhone presently. 3G subscribers now represent 16% of China's wireless subscribers and double the 8% from a year ago. Even though Apple may have a different challenge in China than in other countries, I believe the country is large enough that Apple will grow and make billions more in revenue regardless of what it faces. Apple needs China if it intends to grow itself to the next level of profitability.