Five Reasons Apple’s iPhone Will Succeed in China

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Includes: AAPL, CHU, TCTZF
by: Jason Schwarz

With the iPhone getting set to launch in China this month, what are the expectations? According to the majority of recent analyst upgrades, Chinese sales expectations are low. In their upgrades, analysts are talking about accounting changes, they’re talking Mac upgrades, they’re talking Tablet, they’re talking about the smartphone bonanza, but no one seems too concerned with China. I suppose most are lumping the Chinese market into the same category as India or Russia-two countries where the iPhone hasn’t lived up to the hype-mainly because of the high price tag. In those countries the carriers don’t offer subsidies. I think China is going to be different. Here’s why:

1-Apple (NASDAQ:AAPL) will beat the black market price. According to Peter Borrows of BusinessWeek, there are already more than a million iPhones operating in China that were either bought overseas or bought on the black market. Clearly, there is a demand for Apple products. A smuggled 8 gig iphone can cost 3,600 to 4,000 Yuan and a 16 gig can cost 5,000 Yuan compared to China Unicom’s (NYSE:CHU) much lower subsidized price alternative. In one of the 2-year subscription agreement options, Chinese consumers are able to get a free iPhone from Unicom. The subsidy pricing model is relatively new to China; it has the potential of catching fire.
2-No cancellation fees. In the United States, the iPhone’s exclusivity agreement with AT&T (NYSE:T) has slowed the pace of sales because consumers don’t want to pay the cancellation fees with their current provider. Cancellation fees on a 2-year agreement typically range from $250-$350 depending on the carrier. In China it is much easier to switch carriers as most users have a prepaid phone without being attached to one carrier. This freedom could work against Apple however. Will Chinese consumers be willing to lock into a 2-year agreement with Unicom? We shall see.
3-Increased distribution points among the world’s largest population. Despite agreeing to a deal with China Unicom, Apple is still in talks with China Mobile and with large cell phone retailer, Di Xing Tong, which operates hundreds of storefronts in China. The chain is owned by Foxconn, the manufacturer that Apple already has a relationship with. Keep in mind that the number of Chinese mobile subscribers almost doubles the entire United States population.
4-Apple advertising. The iPhone launch in India was hurt by a lack of buzz. This does not appear to be the case in China. Philip M. Nichols, a professor of legal studies and business ethics at Wharton, noticed on recent trips to China that the hype was starting to build, “You cannot go into a Carrefour in Beijing right now without getting iPhone advertising right in your face,” said Nichols, who visited twice in August. “They are really advertising the heck out of it.” Wharton marketing professor Z. john Zhang adds that Apple could use the grey market to its advantage by capitalizing on the iPhone’s existing popularity, “They can say ‘we know you love the product’. That’s not something they could do when they initially launched the product in the U.S.”
5- First time for 3G. China Unicom recently launched the nation’s first 3G network. It’s obviously not available everywhere and it surely will take time to work out the kinks but it is 3G. In a country where only 1 out of 8 households owns a personal computer, 3G web browsing with the iPhone is going to generate plenty of excitement. If the iPhone is compatible with the popular Chinese instant messaging service Tencent QQ (TCEHF.PK), which I believe they are, then this high speed technology will take off. Some estimate that half a billion Chinese are logged onto the QQ service. in September, Tencent launched a web-based version of its product which allows users to use the service without any installation of software. In the states we text message and use social networking sites like Facebook and Twitter; in China they use QQ. Word of mouth marketing for the iPhone through the QQ network will be effective.
Not one dollar of Chinese iPhone is priced into Apple stock. This is one of many reasons why I am forecasting that Apple stock will reach $400 a share in my new e-book, Apple Revolution. Yes Apple’s accounting change is a big deal for the stock, yes the Mac cycle is a big deal, yes the Tablet could become the company’s flagship product, yes the smartphone bonanza will continue, but don’t underestimate the gradual impact of China. With low expectations, the iPhone may have a lackluster launch but it will be a significant growth driver going forward.

Disclosure: Long AAPL