Apple's International Growth Curbed By High Prices

By Nikhil Shamapant - March 26, 2012 | Tickers: AAPL, GOOG, MSFT, NOK, SNE | 0 Comments

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Apple (NASDAQ: AAPL)'s recent move to start a dividend and initiate share repurchases signaled a big change in the history of the company. It signaled the beginning of the Tim Cook era and a new Apple movement to reward its shareholders beyond price appreciation. Of course, as expected, Apple remained unable to address its foreign cash pile. The entire share repurchase program and dividend policy will be funded by US cash, rather than the growing cash hoard outside of the US. Now, Apple's reasoning for not using foreign cash in a dividend or share repurchase is that repatriation taxes make it expensive for management to move the cash back. However, as they continue to make money internationally and grow that cash hoard, the repatriation problem gets bigger and bigger as their potential tax losses increase with the amount of international cash. Motley Fool Analyst Eric Bleeker believes that Apple's cash hoard may even become larger than Microsoft (NASDAQ: MSFT)'s current market cap by the end of 2014, and he goes on to explain why he believes that Apple's momentum will continue in this article. 

However, while there's no arguing Apple has a bright path ahead of it, it will continue to be overshadowed by the question that it has refused to answer for some time now: What to do with it's cash? If not direct shareholder returns (via dividends or share repurchases) it seems that Apple's alternative is to use its cash to maximize growth internationally. They could do this with a large acquisition (which isn't quite Apple's style), or they could do this by purchasing larger infrastructure in many of the foreign countries that they have yet to enter. Regardless, I believe that the repatriation tax problem doesn't quite end there. Apple's foreign growth is ultimately troubled by the overblown costs of Apple products throughout the world, and the different consumer cultures they enter internationally.

The Pricing Problem May Slow Growth?

*All Prices are noted in US dollars *Prices are sourced from Apple.com, or links from Apple.com to international iPhone providers

Would you buy an iPhone for $867? In fact, would you buy an iPhone for $513? It's tough to imagine their consumer base growing at rates comparable to the US with prices as much as 4 times higher in Apple's key international areas of growth. With populations 4x the size of the US, there is a huge market for Apple to grow in if it can overcome the need to price its products this way. Of course, it seems pretty obvious when you put it this way, so why does Apple keep prices so high?

The phone appears much more expensive internationally than domestically because of the way phones are sold in these areas. In the US, you pay $199 for the iPhone upfront, but you are really paying the rest of the price in your long term phone contract. In India, the system is a bit different. In India, you are essentially paying Airtel to provide iPhone service to you for the duration of the contract, and over that time, Airtel 'pays you back' with airtime credits over the time of the contract.  Put another way, in the US you are paying for the contract big time, and the iPhone cost seems insignificant. In India, you are paying for the iPhone big time and contract costs seem insignificant. The model is a bit bizzarre, but it forces Apple to play a different pricing game in India and other foreign countries than it does in the US. This different phone pricing model seems to be keeping iPhone prices high in China as well, and I can only assume the same is the case in Indonesia.

Of course, Apple has a long way to go in foreign countries. In India, Nokia (NYSE: NOK) leads mobile phone makers in market share, holding 59.5% of the market. They are followed by Sony (NYSE: SNE) at market share of 8.1%. Meanwhile Apple is also finding major competition in its international country of choice: China. Microsoft is entering the chinese market, and regional executives are predicting complete dominance in the market (very unlikely, but it shows that they are determined to make a strong attempt). Regional CEO Simon Leung plans to take Chinese majority market share by 2016, and interestingly enough, his strategy for expansion there is: Low prices.

Microsoft plans on pricing its devices at roughly $158 in China, thoroughly outdoing its competition. Analysts believe that Microsoft will give Apple a run for its money, predicting that Microsoft will reach 20% market share by 2016 (with Apple holding 16% market share and Google (NASDAQ: GOOG) holding 60% market share). Google is another threat as its Android platform begins to penetrate the markets.

The combination of Google and Microsoft's pricing and quality competition in China may become a barrier for future growth. At the very least, it's certainly something for shareholders to watch out for.

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