Many believe that the new iPhone could be the first truly global smartphone to be launched by Apple (AAPL). For that to be true, however, Apple needs to support the currently incompatible 3G network of the world's largest wireless carrier, China Mobile (CHL). The iPhone is already available on China Unicom's (CHU) as well as China Telecom's (CHA) networks.
However, while speculation has been rife about Apple and China Mobile partnering soon and unlocking the huge potential that the burgeoning Chinese smartphone market holds for both companies, employees at China Mobile seem to believe that such a deal is unlikely in the near-term. Even the company's chairman, Xi Guohua, has reportedly said in a recent interview that while the two companies are willing to ink a deal, a 'lag' in the development of a Qualcomm (QCOM) chipset that can support the carrier's proprietary 3G network is proving to be a major deterrent.
The 'lag' probably points to Qualcomm's ongoing 28nm supply chain problems. The MDM 9615 chipset that supports TD-SCDMA as well as many LTE networks may have also been impacted by the shortage, forcing Apple to delay a China Mobile launch until the issues have been sorted out. While Apple's deals with China Unicom and China Telecom may to an extent hedge the risk of a China Mobile deal not coming to fruition, Apple will eventually need to sign on China Mobile to make the most of the long-term China growth story.
Upside to Apple from a Bigger China Play
China, as a whole, is a big market for Apple and the company has been gradually increasing its focus on the region, growing revenues at a record pace over the last few quarters. Revenues from Greater China, which includes mainland China, Hong Kong and Taiwan, in the recently concluded July quarter grew threefold year-over-year and accounted for almost 20% of Apple's overall revenues. This brought Apple's FY 2012 first half revenues from the region to $12.4 billion, just shy of the $13.3 billion in revenues Apple managed to generate from the region during the whole of last fiscal year. With China expected to leapfrog the U.S. as the world's largest smartphone market by the end of 2012, it has become a strategically important region for Apple.
And this is precisely why a China Mobile deal can prove to be a game-changer for Apple. With close to 700 million mobile subscribers (more than six times as big as Verizon) and a 3G penetration of only about 10%, China Mobile gives Apple a tremendous opportunity to increase its market share in one of the fastest growing smartphone markets in the world. In a previous analysis, we discussed how a China Mobile deal could alone add an almost 18% upside to our current $700 price estimate.
Compatibility issues mar potential alliance
However, while China Mobile has close to 70% of China's wireless subscribers, its lead in 3G is not that substantial. As of July 2012, China Mobile had around 69 million 3G subscribers, less than 40% of the overall 3G base and only about 13% ahead of 61 million that subscribe to China Unicom's 3G network. China Mobile's incompatible 3G network and a low 3G penetration of around 18% in China have given smaller carriers such as China Unicom and China Telecom ample opportunity to compete on an even ground with the otherwise dominant carrier.
Therefore, with iPhone deals with both the smaller carriers already in place, Apple may not have a lot to worry about in the near-term if Apple fails to get the iPhone TD-SCDMA compatible. However, as 3G penetration grows, Apple will eventually need a deal with the carrier to market the iPhone to a huge untapped audience of more than 680 million subscribers that are on China Mobile's network. The potential answer to this conundrum could be the 4G TD-LTE network that China Mobile is trialing in a few major cities in China. The new iPhone is expected to be LTE compatible and while the in-built chipset may not support all LTE networks currently, such technology could arrive in the future as LTE usage matures and China Mobile launches a nationwide LTE network.
Of course, this means that if the Apple-China Mobile deal depends solely on LTE viability, it could be a few years before we see these companies come together. For a more near-term solution, Apple will probably look to use Qualcomm's recently launched MDM 9615 chipset that includes support for TD-SCDMA. However, going by Xi Guohua's statements, it seems Apple has decided to give this a pass probably due to 28nm supply chain constraints. This could however also imply that as Qualcomm sorts out its supply issues, Apple will choose to use this chipset in an interim iPhone release solely for China Mobile. This is not entirely inconceivable considering that Apple released a CDMA-compatible iPhone 4 for Verizon in 2011, eight months after it had launched the same AT&T-exclusive device in June 2010.
Disclosure: No positions.