Just How Important is Apple's Chinese Market?
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China this. China that. If you're like me, you've come across many articles on industries ranging from consumer technology, most notably about Apple (NASDAQ: AAPL), to food that include a sentence about the "growing importance of the Chinese market." Then, NOTHING -- or, perhaps one or two stats, if you're lucky. You might feel like screaming:
"Don't leave me hanging. Show me the numbers!"
Well, I'm going to show you the numbers -- specifically, Apple's China numbers, both current and potential.
China's Trademark Wall is Down, iPad 3 To Enter
Apple was in the news last week for reaching a $60 million settlement with the Chinese company claiming it owned the trademarks for the iPad name in China. The trademark dispute has been going on since Apple announced plans for the iPad in January 2010.
The bottom-line is that Apple will now be allowed to start selling the iPad 3 in China. Sales of the tablet, released in March, were halted by the court while the dispute was ongoing. July 20 has been reported as the date the iPad 3 will be available (legally) in China.
This resumption of sales is hugely important given the growing size of the Chinese market; the growing importance of iPad sales, which now accounts for 17% of Apple's total revenue, up from 11% a year ago; and the speculation that a mini iPad is in the works.
China is Now Apple's #2 Largest Market
China surpassed Europe as Apple's second largest market, accounting for $7.9 billion, or 20% of revenue, in the first quarter of calendar 2012. Not only is China's portion of Apple's total revenue pie growing -- but, remember, the total pie itself is growing.
China is Apple's #1 Fastest-Growing Market
Sales to China (which accounts for the bulk of the Asian Pacific region's sales) tripled in the first quarter of calendar 2012 to $7.9 billion. At roughly current growth rates, China is poised to overtake the US and become Apple's largest market by 2014.
As you can see, the Asian Pacific region roughly tied -- with the Japanese region -- for Apple's smallest region in June 2009. In just three years, the region, thanks to China, has gone from a relative blip to a powerhouse on Apple's revenue radar screen.
Given the still-low penetration rate of the iPhone, as well as the the newness of the iPad, and the reportedly planned mini iPad, Apple's Chinese party has likely just begun.
China is iPhone's #1 Largest Potential Market -- By Far
Globally, Apple sold a total of 35.1 million iPhones in the first quarter of calender 2012, representing an 88% unit growth rate over the same period last year. Sales in China -- estimated at 6 to 6.5 million -- were more than 5 times higher than during the same period last year.
Apple now has about a 43% share of the smartphone market in North America vs. about 15% of the addressable market in China, illustrating the phenomenal growth potential in China. The "addressable market" is considered the number of total 3G subscribers. Certainly, non-3G subscribers can purchase iPhones, but most are unlikely to do so as much of the iPhone's capabilities go to waste without 3G speeds.
iPhones should continue to capture an increased portion of the addressable market and the addressable market should grow as China Telecom and China Unicom — Apple's two carrier partners in China — increase their 3G availability. Deutsche Bank's Chris Whitmore estimates Apple will sell 25 million iPhones in China in 2012, and at least 35 million in 2013.
There's a bonus factor not shown in this chart. If Apple adds China Mobile (NYSE: CHL) -- the largest carrier in the world -- as a partner, the addressable market in China would increase by about 125 million 3G subscribers in 2013, bringing the total number of potential customers to almost 425 million.
iPad #1 Tablet in China -- but Market is Growing
The iPad now dominates the Chinese tablet market with more than a 70% share. But keep in mind the tablet market, like Apple's other markets, is growing in size as the middle-class population grows. Also, Apple's products themselves have traditionally created or at least expanded markets, turning "wants" into "needs."
Additionally, the rumored smaller iPad -- dubbed the "mini iPad" -- reportedly will hit the market this fall. Given its (no doubt) lower price point, this product should go over especially well in the Chinese market. It will likely be priced lower than the lowest-priced iPad ($399), and competitively priced with Amazon's (NASDAQ: AMZN) Kindle Fire (starts at $199), Google's (NASDAQ: GOOG) new Nexus 7 (starts at $199), and Microsoft's (NASDAQ: MSFT) planned Surface series (prices not announced, but rumored to start at about $200.)
Microsoft and Google might capture a fair market share in the US, but they've already lost the China battle. Those brand names simply do not have the cache the Apple name does. And the aspirational middle-class Chinese are heavily about cache, and keeping up with the Chinese equivalent of the Joneses.
(I think Apple will start its mini iPads at about $225-250, so as to be competitive with the $200 tablets, but maintain a premium image.)
Macs Also Flying Off Shelves in China
Mac computer sales in China were up more than 60% in the latest quarter, considerably above the 6% growth rate for the personal computer market there, as well as the 7% global growth rate for Macs.
Macs are not nearly as hot as iPhones or iPads. So this figure especially illustrates how hungry the exploding middle-class Chinese consumers are for All Things Apple.
I've already recently called Apple stock a "Buy." Since then, the trademark dispute has been settled plus plans for a mini iPad to be released in the fall have been reported. These factors make the stock even more attractive.
BAMcKenna has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, China Mobile, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, China Mobile, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.