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Summary

  • China Mobile announced dramatically lower smartphone subsidies in response to government pressure and in a bid to boost declining profits.
  • While China's challenges to other Apple products were known, I did not anticipate China's attack on the iPhone.
  • Apple is still a buy, though this news may slow building momentum.

In a potential speed bump that may slow the excitement building around Apple's (NASDAQ:AAPL) expected September 9 announcement of the iPhone 6 (and iWatch), Bloomberg reported Thursday that China Mobile (NYSE:CHL) will cut its device subsidies by $2.1 billion or 38% in 2014 compared to 2013. Cuts are second-half focused, with subsidy spending expected to be only 37% ($0.9 billion compared to $2.5 billion) of that in the first half of the year.

CHL's move was in response to the carrier's fourth consecutive drop in quarterly earnings as well as government pressure. Bloomberg reports the Chinese Assets Supervision and Administration Commission directed all three of China's carriers cut costs.

It is hard to project the impact on AAPL, as iPhones are high-status items in a status-oriented country. However, given that AAPL's (Greater) China sales surged 28% last quarter, largely on the addition of CHL as a customer, any reduction in momentum from CHL, or the other Chinese carriers, is bound to be a negative. Overall, only 25% of iPhones globally are sold with a traditional subsidy plan, however, that figure is much higher in China.

While China's actions to limit sales of iPads and other non-iPhone devices was identified in my article, "Apple Is Cool Again; $110 By October Driven By News, Rumor And Value", a broader negative catalyst from China was not contemplated. As iPhones are decidedly "cool" and popular in China, it is logical that Samsung's (OTC:SSNLF) Galaxy and other premium smartphones would bear a disproportionate share of the subsidy cuts. However, elasticity of demand suggests the iPhone, no matter how cool it is, would also be impacted by any subsidy cuts.

As stated in the opening, I feel this action is a bump in the road given the strong momentum that is building to AAPL's September 9 iPhone (and iWatch) announcements. CHL's actions are certainly a negative, but not enough of one to materially deflect from the "most anticipated phone ever" (Techradar.com). I reiterate my "Buy".

This article only reflects the author's opinion and should not be relied upon as the basis of a buy or sell decision. Investors should conduct their own due diligence and rely solely on their research as the basis of their buy and sell decisions.

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.

Source: Speed Bump For Apple As China Mobile Slashes Subsidies