A Chinese Fumble Could Be Costly

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

China is a big market with an increasingly affluent population. That's a recipe for increasing demand. Some companies are looking to meet that demand, while others seem to be fumbling the ball. Nokia (NYSE: NOK), which is trying to make a comeback, can't afford too many mistakes, for example. Apple (NASDAQ: AAPL), meanwhile, would just like to have a shot to play with the big boys.

A Big Opportunity

China is clearly a big business opportunity for many companies. This is not simply because of a large population. The real story in China is the fact that more and more people are entering the middle class. The experience of Western nations with industrialization gives a pretty clear picture of what will happen next. Simply put, people will start spending their disposable income in an effort to make their lives better.

One of the nice things about being a developing nation is the ability to jump right to edge of the technology curve. Indeed, having let more developed nations work through all of the expense and effort of perfecting new technologies, those that haven't lived through all of the various steps just get to use whatever the end result is.

A great example of this is the quick jump to cell phones in emerging markets where many didn't have land line phones. More developed nations perfected the cell phone, emerging markets didn't need to bother installing copper wires.

Apple Calling

China Mobile (NYSE: CHL) is among the largest cellular service providers in the world. Its markets are China and Hong Kong. A massive customer base gives it an annuity-like revenue stream. The big opportunity right now is the shift from voice to data, which brings with it higher fees and, usually, increased usage. No doubt China Mobile will be a long-term beneficiary of this shift as more and more Chinese consumers find themselves with additional disposable income.

This makes partnering with China Mobile a very desirable thing for handset makers. Getting a deal with this one company would likely mean years of sales growth in China as people upgrade to the newest phones. This opportunity is so material that Apple's CEO made a trip to visit China Mobile's management, most likely to try to get the company to offer the iPhone to its customers.

This is a big statement about how important this one company is to the Chinese market. Apple's big fumble was not managing to get a deal done sooner, working, instead, with smaller carriers. This has held Apple to a relatively small market share, especially compared to what Apple commands in other markets. Some of the problem is related to China Mobile's use of a non-world standard cell technology, but that's an issue that could easily be worked around.

Dropping the Ball

Nokia, meanwhile, has a deal with China Mobile. It even had a big joint sales campaign around the just passed Lunar New Year, a big buying period in China. The product it was selling was the new Lumia line of phones that it created with the help of Microsoft; these phones have received both solid reviews and decent demand in the United States. What Nokia didn't have were phones in Chinese stores. Essentially, the company was just yards away from what looked like a sure touchdown and it fumbled the ball.

It may not be easy to come back from this because of the nature of phone sales. Indeed, once a customer has purchased a new phone and gone through the effort to learn how to use it and move all of their information between the phones, they aren't likely to quickly switch again.

The sad thing is that Nokia once held a material share of the smart phone market in China. In fact, it has a large presence in many emerging markets. This has been one of the aspects of the company that has kept investors interested in its prospects. If it can get a good smart phone into the still growing emerging markets, Nokia has a shot at redemption. Sadly, with so many companies eying the Chinese market, Nokia's troubles, which included trashing its own smart phone operating system, resulted in a massive loss of market share.

Long-Term Impact

If Nokia's China position can't recover from this mistake, the outlook for the company will be materially diminished. That said, it still has notable opportunities in other countries. Still, investors need to keep an eye on Nokia's Chinese fumble because it could be a big drag on long-term performance. And with Apple sniffing around at a key partner, it may not have long to get things right.

Yours,
 


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, China Mobile, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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