Has Apple Breached Great Wall of China?

by: Keith Woolcock

Remember the final scene from Se7en? Brad Pitt is standing in the middle of nowhere when a box is delivered to him by a motorcycle messenger. In case you haven’t seen what is the best horror film of the last ten years, I won't tell you what is inside the box, but it is truly terrible. Analysts who follow Apple (NASDAQ:AAPL) have just had a similar experience. They have just witnessed something that is incomprehensible.

YOY, Asian sales roughly tripled and now represent 11% of total sales, compared to a year ago when Asia represented just 7% of sales. The impact on pre-tax profits will have been even greater with Asia now representing more than 20% of profits.

The ongoing strength of Asia, in combination with the launch of the new iPad product, which I suspect will smash analyst forecasts of 6 million units, is going to make it next to impossible for analysts to accurately gauge Apple’s results this year. The fact that analysts were so wide of the market with their estimate for iPhone sales underlines this. The iPhone was launched in 2007 yet it has just increased sales by 131%, far beyond what any analyst was forecasting. IPhone unit sales across the Pacific Rim were up 474%, while they increased a 184% in Japan.

Apple’s latest results have finally focused investor interest on the scenario I analyzed in this January 28th piece for Seeking Alpha; sales in Asia are exploding. Never before in its history has Apple had a strong brand name in Asia, but that is now changing fast. As we highlighted back in January, this is bad news for Asian handset makers, such as Samsung (OTC:SSNLF) and LG (NYSE:LPL) and it is certainly bad news for Nokia (NYSE:NOK), RIMM (RIMM) and Microsoft (NASDAQ:MSFT).

In March, I visited both Hong Kong and Singapore. Just to remind you, in Singapore I found that 70% of handsets now being sold are smart phones and Apple is taking over 50% of handsets sold. A similar story is evident in Hong Kong, and in South Korea, a market that borders on the xenophobic as far as foreign brand names are concerned, the iPhone’s sales are rising several fold. These sales are coming from a small base, but over the next year, if this order of growth is maintained, it will begin to hit Samsung and LG hard. Many forecasters blithely assume that the Android device will dominate Asia, but these results should at least raise a serious question mark over that assumption.

Over much of the last decade Nokia has been able to cushion its own results with strong sales across the Asian region. More recently RIMM has also experienced strong sales in China and countries such as Indonesia. This may not last; Asia has finally joined the Smart Paradigm zeitgeist and will increasingly turn to Apple. Asian’s have the potential to fall in love with the Apps Store in a way that Europeans and Americans can barely imagine. This is what will make it so hard for other handset makers to compete: They are unable to replicate the Apps Store.

To give you a flavor of the kind of shock that analysts experienced, here is a direct excerpt from the conference call transcript (see full transcript here):

Analyst: I wanted to hear more about iPhones. Why was it so good? The number was actually, frankly, staggering due to the expectations in my opinion.

Apple’s Tim Crook: China has been interesting. If you look at greater China, which we define as mainland China, Hong Kong and Taiwan, the iPhone units were up year-over-year over 9 times.

To put those number in some kind of context, in China the iPhone sells through just one operator, the WiFi chip has been disabled, and the cost is $1000. Meanwhile the per capita income in China is less than $4000. Imagine a coiled spring that has only just begun to release and you have a picture of what Apple can do in the world’s most populous region.

Listen and learn. So, when Apple says that it is astonished by the strength in demand for the iPad, the probability is that it will beat forecasts. Suppliers I have spoken to in Asia seem to think that 10 million units in the first year is a possible number, not the 6 million that so many have focused upon.

Disclosure: No positions