Apple's iPhone Gets a Foot in China's Door with China Unicom

During a post Q2 earnings press briefing, China Unicom (CHU) at long last announced that they've come to terms on a deal to launch Apple's (AAPL) iPhone in China. China Unicom noted that it has purchased iPhones in bulk from Apple and that it would forego Apple's traditional revenue sharing model. China Unicom Chairman/CEO Chang Xiaobing (right) further revealed that his company will offer a subsidy to customers to lower the iPhone's price, but he did not elaborate on iPhone's pricing or the amount of the subsidy.

The official release on China Unicom's website did not disclose deal terms other than a 3-year timeframe and an iPhone launch slated for the 4th quarter:

On 28 August, the Company and Apple reached a three-year agreement for the Company to sell iPhone in China. The initial launch is expected to be in the fourth calendar quarter of 2009. This will provide users with brand new communication and information experience.

Coincidently, DoNews in China reports that a special iPhone for China (Model A1324?) received its network access license (NAL) Friday (August 28, 2009).

Sohu.com reports that China Unicom's iPhone deal is an "exclusive." However, most importantly, no such words ("exclusive") were uttered by China Unicom executives during Friday's press briefing. And the word "exclusive" is also missing from the press release on China Unicom's website. This is key as the door may be open for Apple to negotiate additional carrier deals in China, most notably with with China Mobile.

There were no details (e.g. quantity or price) provided over China Unicom's bulk iPhone purchase. However, earlier in the month, loose-lipped executives from Guongdong Unicom reported that China Unicom would pre-purchase 5,000,000 iPhones from Apple for $1.46 billion USD.

The delay in iPhone launch until the 4th quarter will afford China Unicom more time to complete their WCDMA 3G network build-out. A 4th quarter launch will also allow sufficient time for the second iPhone for China (A1325), now in the approval pipeline, to complete its CTTL testing and to obtain a network access license. As many iPhonAsia readers know, I believe this model will be based on the iPhone 3GS and that it may include WAPI and possibly WAPI/WiFi.

So how will iPhone do in China? First let me disclose that I am an Apple (AAPL) shareholder and while I try to be objective, I am inclined to be more optimistic than many Street soothsayers. In an interview (English version) with China’s MobinodeTV last month, I projected that Apple will sell upwards of 14 million iPhones in China within the first 12 months of a formal launch.

Other analysts have been (*cough* out to lunch) “more cautious” with their forecasts. UBS analyst Maynard Um projects that there could be an "upside" of 1 million iPhone unit sales for Apple in the fiscal year for 2010 (which ends in September). Sanford C. Bernstein & Co analyst Toni Sacconaghi calculates that Apple can sell 2.9 million iPhones in China by the end of 2011.

Um... Maynard and Toni... your iPhone sales projections in China are a tad too modest. It’s entirely possible that the 5,000,000 iPhone pre-buy will prove to be true, and this would immediately blow-away your tepid numbers. Moreover, all of the China iPhone(s) marketing and distribution expenses will apparently be borne by China Unicom.

Several analysts are more optimistic and see the China market as a big win for Apple. Piper Jaffray’s Gene Munster (right) was on CNBC on Friday, and while he did not offer up specific sales numbers for China, he did suggest that many analysts’ iPhone sales projections were going to prove to be too conservative and that we might soon be at an inflection point... "We [Piper Jaffray] believe that iPhone will essentially go vertical, in terms of demand, in the next year, and we think that's going to surprise analysts."

Broadpoint AmTech analyst Brian Marshall (above) was also on the same CNBC interview (see video below). Marshall believes that iPhone is now... "starting to penetrate the enterprise ... typically it has been a consumer device, but we [Broadpoint AmTech] think it's the trojan horse for Apple to enter the enterprise, and people in corporate environments will say, hey, instead of supporting my Blackberry, I want you to support my iPhone as well ... and while you're at it, please support my MacBook Pro."

In a separate interview, Brian Marshall weighed in on iPhone in China. According to Marshall … “The Chinese market will account for about 15% to 20% of Apple's worldwide iPhone sales next year.” Marshall notes that approximately 50% of China Unicom’s customers are post-pay (on contract). Post-pay customers can take advantage of the subsidy that China Unicom will offer to iPhone buyers. Marshall explains … "With 70 million post-paid customers, and assuming flat sales, which are conservative, I think Apple will sell between five and seven million iPhones in China during 2010." He projects that Apple will sell 37 million iPhones worldwide in 2010.

Comments

[Tom Limongello:]

Very excited to see that there will be subsidies for iPhones, and I predict the same for Android oPhones.

I think the 70MM post-paid subscriber number is a good starting point for judging how many iPhones that will sell in China, even more important than the lack of iTunes penetration in China, it's just difficult to get people to move to higher monthly fees and long term contracts in general. It will also be interesting to see if China Unicom's marketing efforts prove effective, and it will be interesting to see how apple's new retail stores in China either do / do not play a significant role in the rollout.

@toms

Aug 30 09:34 AM

[Constable Odo:]

It would be nice for Apple to get a few more retail stores in China, just to let the customers play with some of their products and have a presence. I entirely understand that Macs are likely priced well out of the typical consumer's range, but there's still the iPods that are likely affordable.

I see analysts are saying that Dell will do well in China with their $300 computers and Windows 7 along with that mini-something Android-powered cellphone. It'll be hard for Apple to compete for market share with that really cheap stuff that the Chinese seem to favor.

Aug 30 10:00 AM

[mollytjm:]

yes, i had to laugh out loud when i read those lowball numbers about iPhone sales. have these people ever been to China... or anywhere in Asia? This is a huge, hungry market. Thank you for your very good article.
long APPL

Aug 30 10:25 AM

[apeman:]

No matter what the sales numbers are going to be in China; Apple is becoming a powerhouse, and is growing marketshare. What people have to focus on is the earnings going forward. In Apples case they are expanding and everyone is upping target numbers. Sooner or later the earnings estimates are going north of $7.00. Sooner or later Apple is going to have to split 2-1 or 3-1

Aug 30 10:52 AM

[Timeline St...:]

@Constable Odo: You seem to fall into the same trap that many do when looking at the Chinese market. You extrapolate a common or even dominant behavior (that they all buy the 'really cheap stuff that the Chinese seem to favor'), which distracts you from the fact that Apple doesn't attempt to serve these customers anywhere. It's not their strategy. Even if 10% of 700 million mobile customers consider iPhone, and only 30% of that 10% buy one - well just run the numbers.

I agree with Mr. Butterfield on several counts. First, the media and analysts have been sleeping, which implies to me that the market hasn't begun to value this launch (ie that the stock price is still undervalued). Second, 14 million iPhones sounds like a reasonable number to me as well.

Also agree with Brian Marshall. This was exactly why Phil Schiller mentioned the 200% growth (from 25 million users to 75 million) of OS X since the introduction of iPhone and iPod Touch. What Apple is doing is using the elegance of their handheld operating system, to sway users to completely convert to Mac. Works for me.

Aug 30 02:29 PM

[maniac:]

I do not think that Apple is that hung up on market share to go after the low hanging fruits. There are quite a large population (relative to our population) of well to do Chinese who are into buying high quality goods. The number of Gucci and luxurious stores in the big cities of China is quite impressive. I have visited the country twice within the past two years and I can tell you that there will be people buying Macs and iPhones, otherwise Apple will not even bother to work its way into that huge market.


On Aug 30 10:00 AM Constable Odo wrote:

> It would be nice for Apple to get a few more retail stores in China,
> just to let the customers play with some of their products and have
> a presence. I entirely understand that Macs are likely priced well
> out of the typical consumer's range, but there's still the iPods
> that are likely affordable.
>
> I see analysts are saying that Dell will do well in China with their
> $300 computers and Windows 7 along with that mini-something Android-powered
> cellphone. It'll be hard for Apple to compete for market share with
> that really cheap stuff that the Chinese seem to favor.

Aug 30 09:19 PM

[FreeRange:]

Your headline is misleading - China has had a foot in the door since the iPhone first went on sale in the US. There are already over an estimated 1 million owners in China without Apple spending a dime on marketing or distribution here as they have all been brought in from outside the country. Further they already have wide distribution of the iPod and iPod Touch, along with their computers (albeit low market share on the computer side).

Aug 31 05:37 AM

[FreeRange:]

It is important to remember that the Chinese are very much about "face" and status. When you are at one of the frequent communal meals out (family, workers and friends), the cell phones go on the table so people can see what brand you have. Also, the sheer number of BMWs, Mercedes, Audis and other high end cars on the road here is unbelievable, and they are significantly more expensive in China, and usually purchased with cash. The market is ready.


On Aug 30 10:00 AM Constable Odo wrote:

> It would be nice for Apple to get a few more retail stores in China,
> just to let the customers play with some of their products and have
> a presence. I entirely understand that Macs are likely priced well
> out of the typical consumer's range, but there's still the iPods
> that are likely affordable.
>
> I see analysts are saying that Dell will do well in China with their
> $300 computers and Windows 7 along with that mini-something Android-powered
> cellphone. It'll be hard for Apple to compete for market share with
> that really cheap stuff that the Chinese seem to favor.

Aug 31 05:40 AM