Will China Take a Bite of Cook's Apple?

Ashley is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Morgan Stanley claimed that if Apple (NASDAQ: AAPL) managed to launch an iPhone that’s priced for $330 in China, then Apple stands to triple its market share in China. Also, in January Tim Cook announced in an interview that China would be Apple’s number one market very soon.  Although this looks very promising from one angle, investors have to understand that this may lead to a steep decline as well.  Despite this threat, Apple has to take up the risk and enter China.

Why China?

The obvious answer is the population.  China has the highest population in the world, but why should Apple go there seemingly so late in the game? Well, currently the shift from agrarian to industrial is taking place in China.  Almost every country, including the US, went through this phase, after which they were labeled as “developed.”  When you add this with population, you get the sense of how big the Chinese market's potential is. It is during this phase of development that people started to earn money, and as a result, spend it. Apple is well aware of the fact that if they follow the right path now, they can see above-average sales (just as Morgan Stanley attested). We have to keep in mind that above average sales in the world’s most populated country is equivalent to the maximum potential other countries can offer.

Apple’s Challenge in China

First and foremost, Apple is currently tied up with is comparatively smaller cell phone carriers, which has led to Apple having a relatively small share in the Chinese cell phone market.  Despite this, Apple has a generated a lot of interest in China, an example of this was the fake Apple stores that opened up in China which almost led to riots after the product was completely sold out. This doesn’t help Apple to a major extent, but Apple has to understand the audience and potential they are already missing out on.

To figure out a way and sort this all out, Apple has had talks with China’s biggest service provider China Mobile Limited (NYSE: CHL).  Even though Apple and China Mobile have yet to agree on any terms, China Mobile has recently seen its 3G subscribers increase by 12.55 million in December and January, effectively blowing away it's competition in 3G subscription growth (even the providers who already offer the iPhone). This agreement, combined with the relative stability of China Mobile, will lead to Apple effectively penetrating the Chinese market. But it's important to note that it is going to be a tough task for Apple to work with China Mobile since it is state owned and the technology used in the phones that run on this network isn’t up to international standards. Once the negotiations are done, a lot of extra work on Apple’s side would be required to get their phones running on this network, but considering the reach China Mobile has in their own country, this shouldn’t be much of a problem for Apple.

The Google threat

Market rivals Google (NASDAQ: GOOG) and Apple have been battling it out for quite some time now.  The advantage Google has over Apple is its software. Unlike Apple, Google sells its operating system to other cell phone manufacturers, thus allowing them to avoid the whole “entering a new market” saga. So, since Google only has to worry about making the software and leave the marketing side of Android to its hardware partners, Apple needs to gain entry into China.

Leaving Android aside, have you heard about the new contest conducted by Google to promote their upcoming Google Glass? Well, this is them raising their game to another level, something Apple did with the introduction of the iPhones and iPads. Whether or not Google Glass will become a game changer remains to be seen, but it shows some serious ambition from Google's side to start producing innovations. Apple is coming up with the 'iWatch' (name is not official, nor is the product) but there's really nothing much on the product to comment or speculate about. But Google is doing really good, and with it's share crossing $800 recently (with a P/E of 24), Google growth continues to impress. 

Anyway, Apple’s software is only for Apple devices; hence for Apple to sell its software, they have to ensure that they sell their own hardware and vice versa. This is where Google has the upper hand. Investors have recently noted that Apple’s growth in United States and other such countries is very limited these days.  They’ve already saturated the markets, and for them to survive the only option they seem to have is upgrading their existing products. The lack of new groundbreaking features (like Retina Display, Siri, etc) in the iPhone 5 and the iPad also shows that Apple has to come up with another revolutionary product to keep their existing crowd appeased.

Hence China

What do you do when your primary market is saturated? You try and tap into another potential markets. Apple is lucky to have China as one of those potential markets.  The world’s most populated country is now up for grabs, and as Morgan Stanley has pointed out, getting the price right is really important here.

So, what should you expect when a giant like Apple takes on the world’s most populated country? Well, I expect a lot of big numbers.

ajs360 has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, China Mobile, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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