Apple Inc.: Starting Mobility Efforts In China Instead Of U.S. Makes Sense

Apple Inc.: Starting Mobility Efforts In China Instead Of U.S. Makes Sense
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Apple’s last earnings report was a huge disappointment all around, including the more than 25% decline in sales in China, but analysts don’t seem very concerned about it. They’ve got plenty of non-alarming reasons why sales in the region declined and are encouraged by the company’s recent investment into Chinese ride-hailing service Didi Chuxing.

Rumors about Apple building a car abound, especially in the wake of that investment, which is about more than just mobility. The iPhone maker has a lot at stake in China, and anything it can do to woo Chinese consumers and officials will only serve to improve its image in what is seen as a goldmine for U.S.-based multinationals.

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Goldman analysts not worried about Apple’s China business

Goldman Sachs analyst Simona Jankowski and team gave several reasons why Apple’s sales in China declined in a report dated May 17. The region accounts for 25% of the iPhone maker’s revenue, which is why such a steep decline is seen as such a major concern.

They note that the number of Mainland China tourists visiting Hong Kong tumbled 15% during the first quarter as a result of the Hong Kong dollar’s appreciation against the U.S. dollar peg and restrictions on visa. They said there’s a 95% correlation between changes in the number of Mainland visitors to Hong Kong and changes in iPhone shipments there, which plunged 65% in the March quarter.

Further, the Goldman team said iPhone shipments in Mainland China slipped 12% even though the number of people switching from other smartphone brands climbed 40% in the first half of fiscal 2016. They said this suggests that the decline in iPhone units and the 3-point market share decline came from a lower upgrade rate instead of new customers. China Mobile, the nation’s biggest mobile carrier which also serves a lot of high-end customers, also saw its net adds decline in the first quarter, as China Unicom and China Telecom at the lower end grew. The Goldman team said this drove a shift toward domestic smartphone makers.

Jankowski and team said none of these reasons suggest that the iPhone is losing out at the high end of the Chinese smartphone market. This means the situation now is different than it was in 2013 when Apple was clearly losing market share to Samsung.

Apple invests in Chinese ride-hailing service

Whether there is any real danger to Apple’s business in China or not, the company isn’t taking the March quarter sales decline lying down. CEO Tim Cook took a ride with ride-hailing service Didi Chuxing on his latest visit to China following the announcement that they had just invested $1 billion into the business. Morgan Stanley analyst Katy Huberty sees big implications from this investment, particularly in light of the car rumors and struggling sales in the region.

She noted that the investment into Didi Chuxing straddles the line between being a transformative deal and offering capital return and accretion. This is important at a time when Apple may be transitioning from being a growth stock to a value stock because growth investors seek the former, while value investors want the latter. Many see the investment by legendary value investor Warren Buffett’s Berkshire Hathaway into the iPhone maker as confirmation that it is indeed becoming a value stock.

Apple has designs on China

In the near term, Huberty believes the Didi Chuxing investment may help improve integration with Apple products like CarPlay, Music and Pay, while in the long term, she believes it will help the iPhone maker learn more about the country and services business models. Looking even further out, she suggests that the company may bring its rumored car to the market as “hardware-as-a-service” rather than using the traditional dealership model.

She estimates the ride-sharing opportunity in China at about $145 billion in 2020 if 7% of the 2 trillion projected miles are shared at around $1 per mile, which means this would be a huge addressable market for an Apple autonomous car sharing fleet.

The Morgan Stanley analyst believes it makes sense for Apple to begin such a service in China rather than the U.S. because the market there is more fragmented than it is in the U.S. Further, 90% of the company’s cash is oversees, and repatriating that cash would bring a hefty tax of more than 30%. She also notes that there’s a huge untapped market of 400 million urban Chinese consumers who don’t own an iPhone, compared to 150 million in the U.S., so rolling out a successful ride sharing service in China could help put more iPhones in more pockets there.

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