Apple Seems Desperate to Enter Chinese Handset Market

China Unicom (CHU) plans to introduce two iPhone models to the Chinese market if it finalizes a 3 years exclusive deal with a delegation in Beijing led by Apple Inc.'s (AAPL) vice president of iPod and iPhone product marketing, Greg Joswiak, according to TMT China, a well known Chinese newswire.

China Unicom is also reported to have placed an order with Apple for 5 million of its iPhone handsets. Hopefully the demand will be there.

But here is the best part: Apple has agreed to drop its revenue sharing model (30% / 70%) in order to enter the country. Who said that Apple was not desperate to make it in China? They are...This is a very unusual move from Apple. I think Apple will probably get less revenue share (20% Vs 30% typically) to give more to mobile app developers (80%).

When it comes to the Chinese market, it's all about volume. In exchange for the applications and airtime revenue share, China Unicom was recently reported to have made minimum sales commitments of at least a million units within the first year.

In fact, according to the same report, in its deal with Apple, China Unicom has guaranteed to sell up to two million units a year with sales worth no less than five billion yuan ($730 million), the sources were quoted as saying.

If true,China Unicom is clearly making good progress to sign a deal with Apple to become the exclusive iPhone provider in China. Apple is moving ahead with plan B (China Unicom).

China Unicom has 140 million wireless subscribers. If China Unicom experiences the same success as AT&T (T) (the iPhone captures 11% of its AT&T subscriber base,) we are talking about 15 million additional iPhones for Apple, on top of the 22 million iPhones sold globally by Apple since 2007.

Ultimately, China Unicom could help Apple nearly double (37 million iPhone units globally) its iPhone customer base . Granted, that's a big "if", but it is possible. I am sure Apple would be more than happy with that. My guess is that China Unicom will offer a 16-gigabyte and 32-gigabyte version of the iPhone 3G S.

As noted in a previous post, China Unicom could start selling the iPhone as early as September for no more than $440.

The Apple iPhone 3G S is likely to appeal to many high-income Chinese customers. China is home to more millionaires (364k) than the UK for the first time on record, according to the latest World Wealth Report. According to the World Wealth Report, compiled by Merrill Lynch and Cap Gemini, Asia-Pacific will take the "lead in wealth growth, surpassing North America by 2013. But more interestingly, I was told one day that there were about 200 million Chinese whose income is equivalent to the one of most middle-class Americans.

Bottom line: With China Mobile (CHL) expected to launch its Mobile Market app store next month, if China Unicom does sign a 3 yr exclusive deal with Apple this would be a big blow to China Mobile. As I mentioned before, there is no doubt in my mind that Apple wanted to sign an exclusive contract with China Mobile for the iPhone based on the carrier's large customer base (415 M subs for China Mobile Vs only 140 M subs for China Unicom).

Quite frankly, this situation reminds me of what happened a few years ago in the U.S. when Apple came to Verizon (VZ) to offer the iPhone to the carrier. Verizon was their number one choice, just like China Mobile appears to be their number one choice.

So what is happening here?

1. In order to win the deal, China Unicom has agreed to, among other things, allow Apple to pre-install its online software shop (iTunes) on the iPhone, a condition China Mobile would not accept, according to the Shanghai Securities News.
2. Like Verizon, China Mobile probably wants to keep control of its distribution channel.
3. China Mobile will allow Apple's competing mobile app stores to run on its network. Knowing Apple, this is something that Apple is definitely not happy about.
4. Apple is desperate to penetrate the Chinese market. The fact that Apple has allegedly agreed to drop its revenue sharing model (30% / 70%) in order to enter the country, is the perfect example of this.

Apple has had its eyes on the Chinese market for quite some time. In fact, Apple hopes to make inroads into the Chinese market within a year.

Well, it looks like this might happen sooner than expected if China Unicom does win the deal and starts offering the iPhone in September. With 22 million iPhone sold worldwide, the Chinese market, which is now moving full speed toward 3G, presents tremendous opportunities for Apple.

In fact, there were 687 million mobile phone users at the end of May, according to government data. So far, the iPhone 3G S has only been shipped in 18 countries.

Ultimately, China could provide upsides to Apple’s future EPS and revenue estimates, but most importantly it could help China Unicom take an early lead in the 3G market. Granted, China Unicom has 3 times less customers than China Mobile, but with the iPhone 3G S, the sky is the limit. Ask AT&T!

Ultimately, China Unicom could benefit from Apple’s strong brand, and current momentum. At the end of the day, the iPhone 3G S could set the bar higher in terms of mobile user experience in China and stimulate innovation in the Chinese smartphone market.

Disclosure: No positions

Comments

[FreeRange:]

There are tremendous opportunities for Apple across the board in China. I have been coming here for 10 years and just recently moved to Beijing from the US. There are iPhones all over the place here (and no, not counterfeit ones) and Apple doesn't even sell them in China - it is estimated around 1 million currently. This is without any promotion or distribution. Further, the halo effect for the mac, as the official iPhone launch happens, will be tremendous. With only one corporate Apple store in China, their is indeed significant room for growth. Their is a huge Chinese middle class now that clamors for high quality name brand products - a good example is the incredible number of Audis, Mercedes and BMWs on the road here. Truly eye opening. Go Apple!

Aug 14 02:57 AM

[JamesApple:]

iPhone is one of the most revered item in China, it is the Chinese Dream. iPhone is by far the most practical, durable, versatile, famous name brand, high value, international household, personal, business, and entertainment device in the world. iPhone in the hands of the Chinese will become much more ingenius, loved, and valuable than the Americans, the Chinese (and Indians later) will show the world how a marvelous machine like the iPhone can be utilized to propel the well being of nations and civilizations.

Aug 14 02:59 AM

[Paul Harper:]

The big factor is as ever the 500lb gorilla in the corner & it's TD-CDMA technology. China Mobile will not sit back & let Unicom / Apple rule the roost.
Rumour mongers have asserted that licences for iPhone have been stalled on an ongoing basis, waiting for CHL to launch it's own app store & associated handsets.
More tellingly, CHL is reverting to a Western business model of subsidising handsets & 3G enabled notebooks in return for customer lock in of up to 3 years. It has the cash in bak to do this. I doubt very much if Unicom can match this sort of financial muscle.
That said, if & when iPhone launches, the handsets will be flying out the doors, but for how long ? .... time will tell.

Aug 14 04:28 AM

[Think:]

I wouldn't say they're "desperate" to enter China just because they dropped the revenue sharing model...in giving up that in the negotiations they were able to lock in a guaranteed 3 year contract to sell at least 3 million iphones. So it's not a matter of being desperate, it's a matter of them being determing to enter a market with a huge consumer base and negotiating for the best possible entry. They gave in some but they got some in return...wouldn't say that's desperation.

Aug 14 07:21 AM

[bobringer:]

Wait... so Apple is likely going to pull in over $9 BILLION in free cash flow this year. They haven't just thrown in the towel and conceded to the Chinese for over 2 years.

How does the word desperate even make it into any reasonable story... let alone a headline. Especially when the key point is about some 20/80% split that nobody knows about and hasn't been confirmed by anybody.

I never read past the first few paragraphs because it quickly became clear that I would be dumber if I had continued. I would be wasting my time... and my brain would be filled with some dude spewing stuff on a screen because he likes to see himself type.

Aug 14 08:47 AM

[RLLH:]

Before becoming too hysterical about the Chinese market, remember that it is under Government control. I suspect strange and inexplicable roadblocks will prevent iphone from breaking China Mobile's grip on the market before a Chinese copy appears.

Aug 14 11:18 AM

[johnqh:]

Please, know the subject of discussion instead of copy-and-paste from other non-sense articles.

The revenue sharing model went away one year ago when Apple released iPhone 3G. Apple still get a load of money from each unit from carrier as subsidy, but not revenue sharing.

Author obviously does not follow Apple and cell phone market development.

Aug 14 08:49 PM

[Zoltan L. K...:]

I would not call AAPL desperate. They are taking their time and are not selling at any price. The higher segment in China is still at its very early stage, so they have time to figure out a specific deal for China.

Aug 16 08:37 AM

[Nextel Acce...:]

iPhones & Buick, the Chinese Dream!! LOL

Aug 16 10:45 AM

[jack dee:]

Dropping the Rev share model , is simply Apple trying to make money in china.
Apple is fully aware that any sale is better than no sale and just like dell , msft, Goog, aapl is willing to cut margins to make sales in a market where being a player matters.

What this does show is that AAPL is not a special case like many fanboy non investor types would think , they are just another company trying to make a buck and willing to do what is needed.

Desperate? perhaps just concerned about market share and brand protection; If apple did not make a deal the phones or copies would be sold anyway, just not by apple.

Aug 17 01:07 PM