Foxconn Technology Co., Ltd. (TPE:2354), one of Apple Inc. (NASDAQ:AAPL)’s biggest manufacturing partners, announced Wednesday that it has frozen hiring at its Shenzhen plant in China, sparking intense speculation that this is related to a possible slowdown in demand for the Apple Inc. (NASDAQ:AAPL)’s iPhone 5.
This added more fuel to rumors that Apple Inc. (NASDAQ:AAPL) may have started cutting component orders for the iPhone amid intense competition from Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and other handset makers using Google Inc (NASDAQ:GOOG)’s Android software.
Foxconn sought to play down the rumors by saying that the hiring freeze wasn’t related to any one customer but a higher-than-expected return rate of employees following the Chinese New Year. The uncertainty saw Apple fall more than 2 percent and below the $450 mark once again in trading Wednesday.
Considering that the iPhone is the single biggest driver for Apple and accounts for about half of the company’s value by the firm’s estimates, the intense market nervousness is understandable.
Yesterday, analysts from Trefis have published a new research report on the topic. Trefis believes that a big reason for Apple’s fall of more than 35 percent in the past five months has also been a growing concern that the iPhone demand is waning amid an increasing number of competitive products in the marketplace such as Samsung’s Galaxy S smartphones and Note phablets.
This could have an impact on margins as well – something that Tefis has already incorporated in their long-term forecasts. However, the firm also believes that the iPhone still has a lot of potential, especially in the emerging markets where Apple is yet to sign subsidy contracts with some carriers.
Specifically, the firm see untapped opportunities in China (an in-the-works deal with China Mobile Ltd. (ADR) (NYSE:CHL) should be the catalyst) and the enterprise contributing heavily to Apple’s growth both in terms of iPhone and iPad sales.
Accounting for that as well as the subsequent margin pressures due to rising competition in a maturing market, Trefis maintainss their $650 price estimate for Apple Inc. (NASDAQ:AAPL)’s stock, about 45 percent ahead of the current market price.
China Key To Sustainable iPhone Demand
With the smartphone market in developed regions such as the U.S. getting more saturated (U.S. smartphone sales grew y-o-y by just 9 percent in Q2), Apple will be looking to tap the fast-growing emerging markets such as China to grow at historical rates.
China, despite being only in the early stages of smartphone adoption, has already pulled ahead of the U.S. as the Apple Inc. (NASDAQ:AAPL)’s worlds largest smartphone market by volume as of Feb. 21. This is an incredible statistic given that 3G penetration in China stands at only about 20 percent currently.
Considering the huge 2G subscriber base that the Chinese carriers are looking to upgrade to 3G, the potential for Apple to ride the boom is huge. This was borne out by the opening weekend sales for the iPhone 5 in China last month, which crossed the 2 million mark and made it Apple’s best ever launch in the country.
However, Apple Inc. (NASDAQ:AAPL) currently sells the iPhone through only the smaller two of the three carriers in the country, China Unicom and China Telecom. A deal with the largest wireless carrier in the world, China Mobile Ltd. (ADR) (NYSE:CHL), remains elusive until Apple can work out a subsidy deal with the carrier, Trefis believes.
How soon that will happen is open to speculation considering the Chinese government’s possible opposition to the huge iPhone subsidies. But considering the increasing seriousness with which Apple has been considering China recently, Trefis believes that a deal is in the offing.
Apple CEO Tim Cook recently said that about 50 percent of subscribers in the world do not have access to an iPhone currently – a figure that could decrease significantly with the potential addition of China Mobile Ltd. (ADR) (NYSE:CHL)’s over 700 million subscribers.
Such a deal has the potential to instantly double the iPhone’s current addressable market in China and act as the next big boost to Apple’s stock.
In order to benefit more from China’s potential, it may behoove Apple Inc. (NASDAQ:AAPL) to consider a cheaper iPhone for the emerging markets that does not compromise much on the build quality and margins, in a move similar to the iPad mini.
This will also help lower the per-phone subsidy costs and potentially help bring China Mobile on board. This would also translate well to other developing markets that want Apple Inc. (NASDAQ:AAPL)’s iPhone but may find the subsidy costs and the retail price tag too high.