China Mobile (CHL) has over 750 million cellular subscribers. That makes it a great carrier for any mobile phone supplier wanting to sell a lot of phones to a single customer. Many observers think landing China Mobile as a carrier is the key to penetrating the Chinese market.
Microsoft (MSFT) no doubt sees China as an important market for its soon to be acquired handset division of Nokia (NOK). Nokia already has a China Mobile deal for its Lumia phones. While Lumias are selling in China, they are not selling enough to make it into the list of top brands despite having China Mobile as a carrier. Why not?
Part of the reason is simple economics. China Mobile's average revenue per user (ARPU) is about $11 U.S. (CNY 66).
That does not leave much room to subsidize a phone. At the same time, with per capita income less than $4,000, most Chinese cannot afford to buy a smartphone costing the equivalent of several hundred U.S. dollars.
Sure, that is changing quickly. China today has about 4% of the world's "affluent" people compared to 21% for the United States. "Affluent" means incomes of over $30,000 annually.
About 100 million Americans earn over $30,000 annually based on data from the Tax Policy Centre.
Applying the ratio of 4% to 21% suggests there are about 21 million Chinese making over $30,000 a year. Call it 30 million to be sure I am in the ballpark of sensibility for the point I am going to make. It is, no matter how you call it, the market for high end smartphones in China is a long way from the market for high end smartphones in the United States. If all so-called "affluent" people in China buy a $600 plus smartphone every 2 years, the market size for "luxury" smartphones is no more than 15 million units annually. Not small, but not earth shattering either.
It should be no surprise that the top sellers of smartphones in the Chinese market are names associated with lower priced phones while the premium brands have had limited success. Sales of 88 million smartphones in Q2 2013 in China were led by Samsung (SSNLF), Lenovo (LNVGY), Yulong, ZTE, and Huawei.
Source: Canalys August 2013
With its prices well below the $600 level I have described as "luxury" in China, Lumia phones have a chance of making some headway in relation to higher priced offerings of its competitors. But it will take time. But, investors who are looking to the Chinese market as the growth engine for Microsoft's phone business may have to wait a while before they see meaningful results.
I am long MSFT.