Is Apple Inc. (AAPL) Too Optimistic About China?

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Apple Inc. (NASDAQ:AAPL) CEO Tim Cook answered most of the analysts’ queries by highlighting the growing role of emerging markets, especially China, during the company’s first quarter conference call. The Cupertino-based company’s revenues from Greater China jumped 29% in Q1 to $8.8 billion. Meanwhile, its North America revenues shrank 1%.

Apple: the reality in China

It’s clear that Tim Cook thinks China is Apple Inc. (NASDAQ:AAPL)’s secret weapon to keep growing in the future. But other research contradicts Tim Cook’s estimates, says technology journalist and consultant Steven Max Patterson. According to IDC, Apple has 7.3% market share in China, but Kantar World Panel says the iPhones occupy 19% share in the world’s most populous country. Kantar’s figures are higher because it covers only tiers 1-4 cities in its survey. But IDC measures the iPhone market share based on the entire 1.3 billion population of China. The image below shows that Apple has a good market share in economically-advantaged regions of China (the blue circle). On the other hand, Android dominates at every price point.

The chart below shows that Android has a clear advantage in countries with low per-capita GDP like China. In contrast, the iPhones have a strong market share in countries with higher GDP. Apple Inc. (NASDAQ:AAPL) wouldn’t want to wait decades for emerging economies to grow rich before they can buy iPhones. So, says Patterson, one way for the tech giant is to focus on high-GDP urban regions, and spend heavily on market development to create market preference for high-priced iPhones.


What Apple should do

Apple Inc. (NASDAQ:AAPL) has started selling iPhones to China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) subscribers. The world’s largest telecom operator currently offers 4G services only in 16 Chinese cities. But China Mobile plans to expand its reach to 340 cities by the end of 2014. Tim Cook has announced to double the number of Apple’s retail stores in the country from 10 to 22. The company has to build a strong retail presence because it can’t rely entirely on telecom carriers to create brand preference or boost demand for iPhones.

China is a highly price competitive market. Apple Inc. (NASDAQ:AAPL) has to maintain its higher profit margins so that it can pour in money to build consumer preference. Otherwise, most customers are unlikely to overlook Android smartphones that offer similar, or better, features at a much lower price. Domestic smartphone vendors like Huawei, ZTE, Xiaomi and Lenovo are selling better quality, unsubsidized smartphones between $150-$300. Apple doesn’t face a similar situation in developed markets. The iPhone prices are 2.5 to 6 times higher. The American tech giant will need a lot of help from China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) to go beyond China’s luxury segment.

Apple Inc. (NASDAQ:AAPL) shares rose 0.43% to $503.70 in pre-market trading Tuesday.

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