Five Reasons Apple’s iPhone Will Succeed in China

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 (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 (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 (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

Comments

[vpwinner:]

Thank you for a very insightful article. How can we get your new ebook?

Oct 14 09:37 AM

[mollytjm:]

Great article. I've been wondering why China isn't getting more play when it comes to Apple stock. Maybe it's that Americans can't really picture what it's like there...the old idea of China doesn't fade easily for most. So many 'city' Chinese have some connection with family members living elsewhere in the world, especially in Asia. They're very connected to what's happening in technology and they want it!

You said it all with a million black market iPhones already in circulation. I think the only problem for Apple will be making the iPhones fast enough...though, since they're really made in Asia, this shouldn't be a problem.
Long APPL

Oct 14 09:46 AM

[rajsekar:]

China is not going to be any different territory for Apple. Good Luck

Oct 14 09:54 AM

[dual cit:]

And what about your ALIF recommendation Jason? Where's you follow-up to this disastrous recommendation ? All good news coming out of them but no one is comfortable with the lean management.

Oct 14 09:54 AM

[Mayascribe:]

China Mobile (CHU) is a stick in the mud stock, and has not participated in the last two months of rallying.

China Mobile (CHL) is only up about $3.00/share over the last six months.

Baffling as to why both stocks are not zooming upward.

Good article, Jason.

Oct 14 11:08 AM

[diogeron:]

Well done, Jason. I find all of your columns replete with thoughtful critical analyses, devoid of undue hype and insightful.

Oct 14 11:59 AM

[nexusil:]

There is a deposit requirement equivalent to the "subsidy", hence the "no cancellation fee".
Which means an upfront 44% to 77% premium over Hong Kong princes, more than a round trip ticket from Beijing.
There is potential, but let's not twist the facts here.

Oct 14 12:10 PM

[Ricard:]

This article ignores the most fundamental aspect of the iPhone - the App Store.

1) Apple will have to get an entirely new set of developers to tag along. None of the app store's voluminous English language apps will be of much use in China

2) These developers will have to be trusted not to pirate, or be subject to pirating, in the country with the most notorious reputation for lax intellectual property rights

3) Apple will somehow have to turn these apps into $$$.

Good luck with that. This is a non-story.

Oct 14 12:19 PM

[VK9141:]

Ricard, in response:

Point 1 - so are you saying out of 600m subscribers (possibly relatively wealthy, educated people) none speak English?

1 and 2: there are a lot of smart Chinese speaking developers throughout the US and the western world who could easily develop such apps from outside China.

Given this, point 3 should follow.

I think it could be big. And how fantastic that the US potentially has a blockbuster product it can export to China (and not the other way round). Way to go Apple!

Oct 14 12:45 PM

[VK9141:]

Oops - it is made in China?

I guess the apps could count as exports?

Either way still has to be a good thing to get China consuming some of its production.

Oct 14 12:49 PM

[ErnestY:]

plus Chinese is very brand-conscious to say the least and owning an Apple product is a vanity thing. The Apple retail shop in Beijing is actually the most profitable outlet for Apple globally.

Oct 14 02:32 PM

[Tony Daltorio:]

The author makes the same mistake all do when they focus mainly on the US. The Apple iPhone will do ok but will NOT be a big hit anywhere around the globe, including China.

Why? Because their technology (like most American tech) is old hat to people in other nations. They've had similar products to the iPhone for years now.

Oct 14 03:39 PM

[air tango:]

@vk9141, i think that apple sales in china can be considered as an export to china since the intelectual property is american...we can assume that chinese direct cost of sales must account for less than 30%...of unit revenue sales...

Oct 14 03:41 PM

[dingding:]

Before I am called a party pooper, let me declare that I am long AAPL.

Unicom will be launching the iPhone without WIFI and China only has a nascent 3G network. Most popular use for mobile phones in China is texting. The majority of users in China use prepaid SIM cards vs subscriptions. And let's not forget the sizable difference in incomes between the US and China, so the target 'audience' is much smaller.

Just a few facts for everyone to think about.

Oct 14 07:01 PM

[Ian Cassel:]

And what is good for the iPhone is good for ZAGG with the #1 selling accessory for the iPhone, Invisible Shield.

seekingalpha.com/artic...

Oct 14 07:21 PM

[steveballmer:]

IT WILL FAIL!

Oct 14 08:13 PM

[Trent Hauck:]

As someone who has played around with app development let me tell you that it isn't difficult to change languages in applications. A properly coded app can take advantage of Apple's localization to turn English apps into any language.

On Oct 14 12:19 PM Ricard wrote:

> This article ignores the most fundamental aspect of the iPhone -
> the App Store.
>
> 1) Apple will have to get an entirely new set of developers to tag
> along. None of the app store's voluminous English language apps
> will be of much use in China
>
> 2) These developers will have to be trusted not to pirate, or be
> subject to pirating, in the country with the most notorious reputation
> for lax intellectual property rights
>
> 3) Apple will somehow have to turn these apps into $$$.
>
> Good luck with that. This is a non-story.

Oct 14 09:57 PM

[Ricard:]

1) There are millions of people here in our country that speak French, German, or Spanish. Yet, all the apps here are in English. To Trent Hauck - I acknowledge your point, but please look at 2)

2) There ARE a lot of smart developers in China. Too smart. Smart enough to figure out how to keep the money that should have went to Apple (or in Trent Hauck's case, American software developers). They don't have to worry about intellectual property rights like we have to here.

3) Apple is a foreign brand, selling in a very nationalistic country.

4) 600m people are not going to be buying an iPhone. Apple will probably be happy with just 6m.

Still, I realize that I may be right and it may not matter. Apple and CHU's stock may go up just on pure euphoria.

Ball's in your court.


On Oct 14 12:45 PM VK9141 wrote:

> Ricard, in response:
>
> Point 1 - so are you saying out of 600m subscribers (possibly relatively
> wealthy, educated people) none speak English?
>
> 1 and 2: there are a lot of smart Chinese speaking developers throughout
> the US and the western world who could easily develop such apps from
> outside China.
>
> Given this, point 3 should follow.
>
> I think it could be big. And how fantastic that the US potentially
> has a blockbuster product it can export to China (and not the other
> way round). Way to go Apple!

Oct 14 10:19 PM

[jack dee:]

Do your homework guys, worldwide the big monies are in prepaid phones.

sure they are not smart like an iphone, but they are vastly smarter than two years ago. And will be even smarter next year and the year after.

We are no where near end game here.

Oct 16 03:19 PM