Apple's Growth in China Pales to Android's

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

In Apple's (NASDAQ: AAPL) prepared portion of its FQ1 earnings call, Oppenheimer noted that the company established a new operating segment called Greater China in an effort to "provide greater transparency." The segment is made up of Mainland China, Hong Kong, and Taiwan. This is now Apple's second largest region. Going forward, Greater China will be a key metric, given the region's large population and growth.

Due to the importance of this region to Apple investors, I'll be examining the region in detail over the next few weeks. I'll touch on subjects such as growth (this article), opportunity, competition, margins, and risk.

The growth

As noted by Apple CEO Tim Cook in the company's FQ1 earnings call, China still represents Apple's highest growth market, with growth "into the triple digits." Furthermore, in the twelve trailing months leading up to Apple's FQ1, iPhone sales in Greater China "more than doubled year-over-year."

Retail is looking up too. The company's retail presence in Greater China has also nearly doubled, going from 6 stores to 11. Premium resellers increased from about 200 to 400. iPhone point of sales increased from 7,000 to over 17,000.

But Cook was quick to note that he expects plenty more growth in greater China: "And now this isn’t nearly what we need and it’s not the final by any means, we are not even close to that . . ."

The importance

China is by far the world's fastest-growing smartphone market. According to research by Informa Telecoms & Media, in 2012 the China smartphone market grew by 85%. A look at Apple's growth in China reveals that the company continues to outpace the overall smartphone market growth in the region.

Going forward, Greater China could potentially become Apple's largest contributor to the bottom line. How Apple approaches China is of utmost importance.

Some perspective

Apple isn't the only company capitalizing on this opportunity. Investors should keep an eye on competitor developments in China as well. Though it's tough to compare other companies side-by-side, due to different reporting methods, Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) both present interesting information concerning their progress in China.

Though Amazon doesn't break down international growth by segment, its international sales (including Europe, China, and Japan) increased by 21% from the company's year-ago quarter. Of particular interest, electronics and other general merchandise (EGM) (representing 60% of international revenues), increased by 37%.

Furthermore, Amazon's CFO, Tom Szkutak, noted that the company is investing heavily in China. He referred to the country as "a long-term opportunity for us."

China is a huge market for Google's Android OS. According to the research from Informa Telecoms & Media, one-third of all Android devices sold during 2012 were sold in China. Even more staggering, two-thirds of all "handsets sold in China" are powered by the Android OS.

Comparatively, Apple only held about 5% of the handset market in China. This highlights the strategic importance of an arrangement between Apple and China Mobile (NYSE: CHL); currently, the world's largest carrier still doesn't offer the iPhone. Apple's efforts to make an agreement are evident in Cook's meeting with China Mobile in early January to discuss "cooperation." The carrier's 700 million customers is a logical next step for Apple in the company's attempt to penetrate China.

The bottom line

The network effect is one of the most powerful forces used to protect profits and marketshare. Bruce Greenwald, known as the "guru to Wall Street gurus," lists network effects as an empowering factor to increase barriers to entry. He explains that network effects increase the switching costs for current customers. With Android's massive scale in China and Apple's minority position, Apple should make China central to the company's strategic efforts in 2013. The longer it takes Apple to capture a larger share of the market, the stronger Android's network effect grows.

Yes, Apple's growth in China is phenomenal and it continues to outpace the industry, but Apple has no reason to get comfortable. In fact, Apple investors should hope that the firm's growth rates in China actually accelerate in 2013 in order to compete more effectively with Google's Android.

Daniel Sparks 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.

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