Apple: The Need of The Hour

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

The news is finally out. Apple’s (NASDAQ: AAPL) iPhone 5 launch party in China seems to have been a resounding success. At least if the initial claims by the company are to be believed. With more than 2 million iPhones flying off the shelves within three days of launch, this does seem to be Apple’s best attempts at foraying into a market that comprises a hefty 16% of overall worldwide company sales. Now comes the big question – will this be enough to boost sagging investor confidence in the ‘king of all tech companies,’ even as it’s battling a slew of odds that include dropping sales of iPhones and iPads amidst stiffer competition in smartphones and tablets, courtesy a certain company named Google (NASDAQ: GOOG) and its Android operating system? Sadly, the answer may be something like ‘not enough.’ But what’s even worse is that this is not the end of Apple’s problems. Here’s how…

A cut-down in orders placed with vendors is a bad sign for any company and Apple is no exception. That actually means the company is putting the brakes on the production of the iPhone 5. Large order cuts in the very recent past were enough to prompt analysts at Citigroup and UBS AG to lower their price estimates and recommendations on the stock. However, coming back to China, that news is unlikely to be a dampener for future sales forecasts. As Brian White of Topeka Capital Markets puts it so well, the very timing of Apple’s iPhone 5 release just before the start of the Chinese New Year and holiday shopping season, is enough to boost sales for the near future.

But for the long term, Apple will really have to work hard to gain a sizeable share of the Chinese market. The reason – its increasing gap with Samsung Electronics that’s flooding the market with Android-powered phones. While Apple is and probably will continue to be the high-end status symbol for phone-friendly Chinese people, Android-powered phones are available at relatively lower prices, and often with more features. That’s perhaps why research firm Analysys International has brought out data that shows Android grabbing around 56% market share with regard to phones that sell for 3,000 yuan ($480) or more, with Apple lagging behind at 42%. That’s further bad news for a company which is already way behind Samsung on a worldwide basis, managing only 17% market share as against Samsung’s hefty 35% in the third quarter, according to Strategy Analytics. What’s worse is that Samsung’s phones are Android-powered and we’re talking about a global smartphone market that’s worth a mind-boggling $219 billion!

All said and done, Apple knows that for grabbing a larger share of the Chinese pie, it simply needs to become lifelong partners with China Mobile (NYSE: CHL), the nation’s biggest wireless telecom provider. Merely partnering with runner-ups like China Unicom and China Telecom will not help much in the long run. But things are not looking up there either. China Mobile said it will not partner with Apple unless the latter rolls out a juicier deal. That’s also giving a better start to old rivals such as Nokia (NYSE: NOK) which is partnering with China Mobile as it plans to sell its flagship Lumia top-end smartphones. Not to forget the fact that Nokia also has a string of lower priced devices all over the market, similar to those of Samsung.

There are several things Apple needs to correct urgently. To start with, as I mentioned in my previous article, the company’s slow product design cycle will have to be changed, as it simply cannot afford once-a-year upgrades, and that too, of an already existing product. A ground breaking product is very much the need of the hour. Add to this a less expensive smartphone for emerging markets like China and India and Apple will truly be the boss in that part of the world too. And someone’s got to figure out a way to rope in China Mobile, and add to Apple’s share of China’s 3G subscriber base. Till then, it’s simply no use flashing mega sales figures to calm jittery investors.

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