China's original role in the Appleverse was that of a cheap labor force, and little else. There have been five different CEOs of Apple, Inc (AAPL) since the company opened its first office in Beijing in 1993, and yet China was still considered a Tier III market for Apple when the iPhone 3 was released in 2008. (By way of comparison, Uruguay and Argentina were Tier II.) In fact, China isn't even mentioned in Apple's quarterly earnings transcripts until 2010.
Clearly, Cupertino's priorities have changed. The long overdue deal with China Mobile (CHL) gives Apple access to a subscriber base that is seven times the size of Verizon Wireless (VZ), the largest U.S. carrier. In fact, if the current trend continues, China will overtake Europe by as early as Q1 2015 and the U.S. shortly thereafter as China Mobile ramps up its investments in its 4G infrastructure. As of this writing, 45 million China Mobile subscribers already use "gray market" iPhones on dated 2G GPRS/EDGE networks for brand identity-factors, and the Chinese luxury market amounts to another 105 million potential iPhone "S" customers in waiting.
My own conclusion, originally stated back in March, is that China will punch well below its weight class on a per capita basis due to the persistent concentration of wealth in the Tier I coastal cities (most notably Shanghai, Beijing, Zhejiang and Tianjin), a handful of Tier II up-and-comers like Dalian and Nanjing, and the corresponding poverty of the peasant hinterland.
Nothing about that has changed in the last ten months or is likely to change in the next ten years, despite the anti-corruption reforms spearheaded by Xi Jinping and the CPC in its collective quest to adapt to The Singapore Model. The above-graphic, for example, was taken from a 2012 research paper by the Hunan Research Institute, but with the exception of Sichaun, it could just as easily have been taken from 2002.
While the bulk of Chinese cell phone subscribers may not be able to afford Apple's products, it probably won't matter much in the near term. China's middle class is still about as large as that of the U.S. (if not proportionately so), as many as 430 million Chinese could be classified as "the core consumer class," that is, a household owning at least six electronic products such as a TV, a washing-machine, a telephone, a mobile phone, a stereo, a DVD player, air-conditioners or a microwave, and consumer spending is projected to rise to 43 percent of GDP by 2015.
The China Mobile deal is a major win for Apple that improves on the company's already compelling fundamentals, and should be viewed as such. For short term speculators, the important question is whether Apple will sell 12 million or 40 million additional units in 2014 to China's 150 million luxury consumers. For long term investors, however, the China Mobile deal represents access not only to the top 10%, but to the 430 million Chinese consumers on the rung just below.
The threat of future mid-range initiatives like the iPhone 5c will also force Samsung (OTC:OTC:SSNLF) to aggressively defend its mid-range market share, as well as increase margin pressure for supply chain partners like Samsung Display, as production from low-end AMOLED panels and other low end/high margin components is replaced with orders for mid-range/lower margin components.