- Bloomberg recently announced that the Chinese government has banned government agencies from buying Apple devices (Bloomberg later reported this initial report was false).
- Any government ban poses no real threat to Apple’s all-important iPhone 6 launch.
- Long-term, China will continue to be a key growth market for Apple with incredible upside potential.
Editor's Note, August 11: This article has been revised since original publication to reflect the changes in the Bloomberg report it referenced.
On August 6 Bloomberg reported that the Chinese government has excluded certain Apple (NASDAQ: AAPL) products from being bought with public money because of security concerns, this according to government officials who asked to not be identified because the information is not supposed to be public.
2 days later Bloomberg announced that, in fact, this initial report was false.
China Is Important, But This Report Isn't
There's no doubting how important China now is to Apple, especially in terms of growth. In the company's latest quarter, reported on July 23, the Greater China segment was responsible for only 15.86% of overall revenue, but was by far the company's fastest growing segment with a 27.88% year-over-year revenue growth rate.
The fear of potentially losing this growth has spooked some investors, and rightfully so. In the most recent quarter, Apple's Greater China segment accounted for 61.35% of the overall company's year-over-year revenue growth. That means without China, Apple would have only grown revenue 2.31% instead of 5.97%.
That said, the impact this government exclusion could have on Apple in China would be minimal, if at all existent. While Apple doesn't break down how much of its revenue is derived from the Chinese government, I can't imagine this number being at that high. Tensions have existed between the American and Chinese governments for years, so it's hard to imagine Chinese governmental agencies buying up loads of American products.
The other aspect of this situation is the Chinese population's reaction to this news. That is contingent on this news going public in China, which isn't a guarantee. Remember, according to its source, this report is "not public information." So even if the report sneaks its way onto a few Chinese websites, it certainly won't be on the evening news.
iPhone 6 Still Will Be A Massive Success in China
With that behind us, we can look forward to the iPhone 6 launch, which has the potential to be record-setting for Apple in China. On Tuesday, August 5, Cantor Fitzgerald analyst Brian White released a research note regarding the iPhone 6's potential in China. His report noted:
"During our trips to China over the years, we began to notice a growing trend starting in early 2012 toward consumers purchasing 'awkwardly' large smartphones that were often 5 inches or above. Today, these mega-sized smartphones are seen as a fashion statement in China and also help consolidate devices. With the growing popularity of these mega-sized smartphones, we noticed a loss of momentum with the iPhone franchise in China. That said, during our recent trips to China, we have asked our contacts about the general interest level from Chinese consumers around a potentially larger screen size with the iPhone 6, and the feedback has been overwhelmingly positive."
As Apple is expected to release both 4.7-inch and 5.5-inch iPhone 6 models, Apple will finally be able to appeal to a large segment of the Chinese population that apparently loves "phablets."
You also have to remember how little of the Chinese market Apple currently holds. As of the Q2 of this year, Apple only held 6% of the overall China smartphone market. With China Mobile (NYSE: CHL) ramping up its 4G network later this year, IDC projecting nearly half of all Chinese phones to be running on 4G by 2017, and the iPhone being one of only a select number of smartphones on the Chinese market that currently supports 4G, the ingredients are there for success.
Add on top of that the facts that China's smartphone market is the biggest in the world (with 108.5 million units shipped in the second quarter alone) and one of the fastest growing (from just over 200 million shipped in 2012 to over 500 million projected to ship in 2017).
While it has gotten a lot of coverage, Bloomberg's report about China's government banning the purchase of Apple devices is nothing to worry about (primarily because it was proved to be false). Apple is still on track for a record-breaking product iPhone 6 launch later this year with many more years of robust growth to be had in China.
Consider this: if Apple can just capture just a tenth of the Chinese market by 2017, and IDC's estimates are accurate, Apple could sell 50 million iPhones in China in 2017 alone, a third of the total number of iPhones Apple sold in total last year.
Such opportunity makes me excited for Apple's Chinese prospects going forwards, as it should make you. Happy investing!
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.