Earlier this year, Apple’s (AAPL) Chief Executive Officer (CEO) Tim Cook expressed his belief that China will become the company’s largest market in the near future. To meet this target, to-date in 2013, Apple’s CEO made a couple of visits to China to meet the chairman of the world’s largest telecom operator China Mobile (CHL) Xi Guohua.
It seems that these visits have finally paid off. Reportedly, Apple has inked a deal with the Chinese telecom operator. Although there was no official confirmation of the news from either of the parties, The Wall Street Journal noted that iPhone will be possibly available to China Mobile subscribers by the end of this month.
Apple’s partnership with China Mobile is expected to reap massive gains for the iPhone maker. The deal gives Apple access to more than 759 million mobile users in its second biggest market after the U.S.
Currently, China along with the U.S. contributes more than 10% of Apple’s revenues. To show the country’s growing importance, Apple simultaneously launched its new iPhones (5S and 5C) in China along with the U.S. and U.K. in September.
In fiscal 2013, Greater China revenues jumped 13.0% from 2012 to $25.42 billion. The company noted that the improvement was primarily driven by higher demand for its products among the affluent middle class in China. Apple has 12 retail stores in China and Hong Kong.
Despite this significant growth, Apple continues to lose market share in China. According to IDC’s September report, Apple’s smartphone market share was under 10% in the third quarter of 2013. Apple was placed at #6, down from #5 in the previous quarter.
However, IDC expects Apple’s smartphone market share in China to double from this year to 2014, primarily driven by the China Mobile deal. Despite a hefty price tag for its new iPhone 5C (4,488 yuan or $733.0) that primarily caters to medium and low-end consumers, IDC believes that a partnership will attract new consumers.
Apple has been offering iPhones in China through two relatively small carriers, China Unicom Ltd. and China Telecom Corp (CHA). As compared with China Mobile, China Unicom and China Telecom have 276 million and 183 million customers, respectively.
We believe that this partnership will boost Apple’s competitive position in China. The company faces stiff competition in the country from low cost smartphone devices offered by Samsung, Huawei, Lenovo, ZTE and Xiaomi, which are powered by Google’s (GOOG) Android operating system.
Improving market share in China is expected to boost top line and profitability. We believe that the deal will help Apple to gain significant market share without sacrificing its iPhone gross margin, going forward.
Currently, Apple has a Zacks Rank #3 (Hold).
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