A Great Wall of Competition Awaits the iPhone 5 in China
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With the share price of Apple (NASDAQ: AAPL) soaring to a 52-week high in anticipation of the imminent introduction of the long-awaited iPhone 5 smartphone, much of that surge can be attributed to the expectations of healthy sales in China. What will also be robust in China is the competition from other smartphone companies in the People's Republic. Most likely, China will surpass the United States as the biggest market in the world for smartphones and that has not gone unnoticed by the industry counterparts of Apple.
In the most recent quarter, Apple ranked second in smartphone shipments in China, with 17.3% of the market, according to Gartner, a research firm. Samsung, which offers the Galaxy smartphone with Google (NASDAQ: GOOG), was the top company, with 19.2% of the market. Other competitors of note included Research-in-Motion (NASDAQ: BBRY), which introduced the first smartphone to the world with the Blackberry. Nokia Corporation (NYSE: NOK), teaming up with Microsoft (NASDAQ: MSFT) on the Windows smartphone, sells the second most mobile phones around the globe of any company, behind only that of Samsung. Amazon is widely expected to be coming out with a Kindle Smartphone, too, which could make sales of iPhones even more challenging as the Kindle Fire has for the iPad.
The home team line-up of Chinese smartphone companies is indeed formidable, too. These are companies that are shrewdly not trying to compete with Apple and the iPhone 5 at the high end of the smartphone market. There is no use: more than likely, there will be crowd control problems at the Apple stores in China starting in September. That happened with the iPhone 4S, which was just a souped-up version of the iPhone 4, so it will surely happen with the iPhone 5.
Smartphones from Xiaomi Technology, ZTE Corp., Lenovo Group and Meizu Phones, among many others, will undercut the iPhone 5 in price in the People's Republic. The successor to the MiOne smartphone from Xiamomi Technology, termed the "hottest smartphone" in China by Forbes magazine, is expected out soon. It is projected that it will have top-end specifications besting those of the iPhone 4S, at about 50% less in cost.
In addition, Samsung introduced the new Galaxy Note 2 on August 29 at the IFA trade show in Berlin, the major consumer electronics show in Europe. That was obviously intended to divert attention away from the September 12 unveiling of the iPhone 5. The new Lumia handset is due out from Microsoft and Nokia on October 29. Research-in-Motion is supposed to be rolling out the business-friendly Blackberry 10 in January 2013, to capture first quarter IT buying and deny that market to Apple. It is difficult to imagine either of these crimping early iPhone 5 sales, however, as the pent-up demand for it is simply too overwhelming, at this stage. The price rise in Apple stock evinces that.
What could bring the price of Apple shares back down is the cost differential in smartphones in China; and what the consumer in the People's Republic is willing to pay. A huge part of Apple's revenue growth is expected from sales in the People's Republic of China. But the high cost of the iPhone 5 will cede a major share of that away. According to IDC, an industry research group, only about 11% of the Chinese marketplace goes for smartphones that cost $700 or more. Smartphones costing $200 or less constituted fully 40% of the sales in the People's Republic.
Michael Clendenin, Managing Director for RedTech Advisors, a consulting firm based in China, advises that, "The sweet spot of afford-ability in China is 800-1500 yuan ($130-$240)." That is not the iPhone 5, that is for sure. The initial sales of the iPhone 5 will undoubtedly be strong, but the price differential could prove to be decisive as the lower end smartphones are very serviceable, too.
There will be about 140 million smartphone shipments in China this year, according to the Gartner Group. That will top the amount in the United States. A recent article about this stated strongly that for China, "Growth is driven largely by smartphones made by ZTE Crop, Lenovo Group and smaller firms." If the price of Apple stock is to continue rising based on assumed greater revenues from sales in the People's Republic, it will have to draw many more Chinese buyers into the upper brackets of the smartphone market.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Nokia. 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.