$1000 Reasons Why Apple Needs China Mobile
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China: the final frontier. These are the voyages of the tech giant, Apple (Nasdaq: AAPL). Its mission: to give investors a second chance to make new profits, to scale trade barriers with the new iPhone 5; and to boldly go where their stock price hasn’t gone before.
With apologies to Gene Roddenberry, China holds the key to Apple’s continued growth. At present, Apple has captured about 15% of their potential market, and in the 1st quarter of 2012, sold approximately 6 million iPhones. Deutsche Bank analyst Chris Whitmore expects iPhone sales in China to grow to at least 350 million next year.
Pairing with China Mobile (NYSE: CHL) would give Apple immediate access to the world’s largest mobile service provider’s 665 million customer base. But there’s only one – albeit one very large - problem standing in Apple’s way of hitting the $1000 per share mark. China Mobile’s 3G network, TD-SCDMA, the fastest growing major air standard for smartphones in that country, isn’t compatible with iPhones. The odd one out, Apple is the only smartphone brand competing in China that does not offer a product compatible with China Mobile’s network.
Apple got a rude awakening this week when Taiwan Semiconductor rebuffed a $1 billion dollar offers from both the tech giant and Qualcomm (Nasdaq: QCOM) to set aside production space for the sole purpose of making Apple chips. It must have been a strange feeling for Apple’s representatives to finally run into a company that was large enough and strong enough to say no. The same holds true for China Mobile. With a market cap of $214.49 billion and net cash of $57.43 billion, which is double Apple’s cash of $28.54 billion, the litigation and intimidation tactics that worked on Samsung won’t cut it with China Mobile.
So what are Apple’s options?
Enter Qualcomm, Apple’s chip maker of choice. The company is designing a new chip that will work with China Mobile’s 3G system to give Chinese consumers what they want: iPhones. Chinese Apple fans have already bought over 15 million iPhones and there’s a ready-made audience waiting to buy more. FRB Capital analyst Craig Berger is predicting that iPhone sales in China will be sky-high in 2013. “We estimate that Apple should sell 250 million iPhone 5 units at an average ASP of $575, generating nearly $144 billion in revenue, $77 billion in gross profit, and $47 billion in net income."
But at this particular time, Apple is still trying to figure out how to break into the Chinese market. According to research firm IHS iSuppli, Apple has lost ground this year and dropped to 7th place, giving it a Chinese market share of only 7.5%. Coming in at number 1 was (you guessed it) Samsung with a 20.8% market share followed by Lenovo in 2nd place and ZTE in 3rd.
Apple’s remaining option is to manufacture a low-end 3G iPhone and sell it for about $99. Of course, the odds of this happening are as good as Apple calling off their patent infringement lawsuits and making nice with Samsung.
For the past few months, Apple has been in talks with China Mobile representatives, assumedly about getting the iPhone onto China Mobile’s network. But with the new iPhone 5 release just weeks away, the smart device giant needs to convince China Mobile that the best way to increase their customer base lies with Apple.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, China Mobile, and Qualcomm. Motley Fool newsletter services recommend Apple and China Mobile. 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.