Think Apple, Think Asia

By Peter Pham - April 26, 2012 | Tickers: AAPL, BBRY, GOOG, MCHI | 0 Comments

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Apple (NASDAQ: AAPL) reported their latest earnings earlier in the week and it shocked a number of people, especially those who only see the world through the eyes of the West.  Living in Ho Chi Minh City, Vietnam, I can tell you first-hand that the demand for Apple products here is nothing short of insane. 

The official numbers out of China were enough to make the headlines with Apple selling iPhones at five times the rate they did in 2011.  Revenue in China hit $7.9 billion, up nearly 300%.  In their first two quarters of 2012 they have done nearly the same amount of business they did in all of fiscal year 2011.  The revenue breakdown was equally impressive for the entire Asia-Pacific region rising from 22.1% in Q2 2011 to 29.2% in Q2 2012. 

Never Get Involved in an Asian Land War

It is hard for those in the West to understand just how many people live in Southeast Asia and what it means for those populations to grow economically at 5% to 10% per year for a couple of decades.  Indonesia is 237 million people.  Vietnam is nearly 90 million.  China is more than 1.2 billion.  The law of large numbers tells us that the rate at which people are moving up the economic ladder is just faster in the East than it is in the West.  And those people have grown up wanting what the West has: the food, the toys, the cars, the comforts that make living life easier.

Branding is extremely important in Asia.  And Apple has unparalleled brand loyalty among its users.  Translating that over here where there is that desire for things American and/or European it only makes sense that Apple would evoke such a strong response.  

Here in Vietnam the market is so strong that a number of knock-off Apple stores have sprung up.  They are not official Apple stores but rather importers who then claim to be something they aren’t, namely authorized Apple dealers, filling demand for those products that have yet to be released here, like the iPad 3.  As I walk around Ho Chi Minh City there’s an Apple logo on every street corner. 

While there’s no question that Apple will have its work cut out for it in holding off Android, it’s important to remember that Apple’s perception built by its branding is a very powerful moat around its business.  Brand loyalty is something that Google (NASDAQ: GOOG) cannot seem to build outside of the search space.  As good as Android is and how many units are being sold, the fight here seems to be another iteration of the Apple’s focus on design simplicity and functionality versus the competition’s open architecture and flexibility which most people think they want but many do not actually use. 

Those two philosophies speak to completely different demographics and because of that Google will have a harder time building a moat around its OS. The next mobile OS that is better will relegate it to the same place that Research in Motion (NASDAQ: BBRY) is currently heading.

Who Says Advertising Adds No Value?

It is Apple’s approach to marketing that creates this loyalty.  As consumers we would all prefer to do business with people who share our values, who we would want in our communities.  Community is extremely important in Asian cultures.  We are different people than Europeans and it is because of that, I think, that Apple has such a fanatical following here.

Think of the classic Apple advertisements, the “1984” ad or the “Here’s to the Crazy Ones…” ad, and realize that they are speaking to the part of us that wants to change the world and they want to be a part of our doing so. Deep down, who doesn’t want to be a part of that group? 

Apple markets from the heart to the head, not the other way around. That’s why their brand is bulletproof and why they can seemingly do no wrong, even when they do. 

The proof is, as they say, in the pricing, as Apple enjoys better pricing leverage here than in the U.S. A quick perusal of the foreign exchange rates (4/25/2012) and the various Apple stores yields up the following prices:

So along with the numbers of iPhones sold in China this past quarter, note also the far higher premium paid for each one.  And the people are happy do to so.  While Apple’s market share in China is small, it should improve once the iPhone is available on China Mobile with its more than 600 million subscribers. 

With China seeming to have navigated the worst of their property bubble it’s a fair bet at this point to look at investments that will take advantage of this.  The charts of the major Chinese ETFs, like iShares MSCI China Index Fund (NYSEMKT: MCHI), look like the market sees China’s large caps as priced fairly.

The trend in Southeast Asia is towards more regional trade and while it looks to some that Apple’s earnings may have been saved by China, I see it as another example of the inevitable shift of capital from West to East and the beginning of the dominance by Southeast Asia on the balance sheets of the West’s biggest companies.

So, if you think those calls for Apple at $1000 per share are crazy then I think you are underestimating the power of nearly 2 billion people to change the world.

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