This article discusses the reasons why I believe that Apple (NASDAQ:AAPL) and China Mobile (NYSE:CHL) may have finally made a deal. While there has not been an official announcement, a deal between the two companies has been discussed since 2009.
Why a deal with China Mobile would be significant for Apple
China Mobile is the world's largest mobile phone company by users, with over 726 million subscribers (end of Q1 2013). By comparison, Verizon Wireless has about 98.93 million subscribers (end of Q1 2013), ATT Mobility has about 107.25 million (end of Q1 2013), and the US population is about 315 million. Apple striking a deal with a company of this size, thereby gaining access to its subscribers, would be very significant.
One barrier to an AAPL-CHL deal has been that the iPhone doesn't work well on China Mobile's network. Apple already sells phones to China Mobile's two biggest competitors, China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA). China Unicom struck a deal with Apple in 2009, and China Telecom did in 2012. As a result, CHU and CHA have been able to steal high-end customers from China Mobile. The problem relating to China Mobile's network incompatibility, however, may already be solved (see reason 2 below).
The deal is also significant because it involves Apple producing less-expensive phones. Even if these phones are initially produced for the Chinese market, they could be the basis for a cheaper phone in other markets, such as the U.S. Since low-income individuals are less likely to buy expensive phones, a low-priced phone could increase Apple's market penetration. I believe it can be assumed that the low-priced phones would be different from Apple's high-priced phones - in terms of the features available, hardware performance, and so on - so there should be minimal cannibalization of high-priced phone sales.
1. It appears that Apple is planning on using a Taiwanese company to produce a cheaper iPhone. Reuters reported on May 9 that Pegatron Corp., a Taiwanese manufacturer of iPhones, stated that it intends to add up to 40,000 people (the population of a fairly sized town) to its workforce in China of about 100,000 by sometime around Q3 or Q4. It is believed by some that the purpose of this hiring is for producing a new iPhone.
2. The new Qualcomm LTE chipset supports the network used by China Mobile. That solves the compatibility issue that prevented iPhones from working well on China Mobile's network. Qualcomm is one of Apple's chip suppliers, and it may be the supplier of chips for the new, less-expensive iPhones previously mentioned above.
3. A respected analyst was quoted as saying that Apple and China Mobile may be close to a deal. On May 8, it was reported on tech.fortune.cnn.com that Morgan Stanley analyst Katy Huberty said in a note to clients that Apple and China Mobile could close a deal before year-end. There are several articles online discussing her note to clients.
4. China Mobile is losing customers to China Unicom and China Telecom because it doesn't offer an iPhone. China Mobile's share of China's 1.17 billion person mobile market dropped from 66% in January 2012 to 63% in May 2013. Based on figures from May, China Mobile has about 63% of the Chinese market, and China Unicom and China Telecom have about 22% and 15%, respectively. Somewhat surprisingly, China Mobile reportedly has over 10 million iPhone users, even though iPhones don't work well on its network.
5. On June 1, China Mobile launched a new global app with an iOS version offered free in the iTunes store that is optimized for iPhone 5. The app is named Jego, and it is designed to compete with Skype. The app itself isn't important to Apple's plans, but the fact that Apple is offering an iOS version of a free China Mobile app seems significant.
6. China Mobile is spending $6.7 Billion to develop a 4G network. Most of China Mobile's service is currently 2G, with 3G only available to about 18% of its customers (as of the end of May).
It seems to me that a deal could be a catalyst for Apple. What do you think? Have Apple and China Mobile made a deal? If so, what will be the effect on Apple's stock price when the deal is announced?
Disclaimer: Perform your own due diligence before making any investment. This article is for the purpose of exploring ideas and should not be construed as investment advice. Do not invest based on this article.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.