Apple: Is It Time To Celebrate in China Yet?

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

It’s something that has to happen one of these days. The only question is – how soon? With the competition breathing harder than ever down its neck, Apple (NASDAQ: AAPL) just cannot afford a half-hearted scenario in China. After all, it’s tough to ignore a country that opens up massive growth possibilities for the future, on the basis of sheer numbers. And now, Cupertino’s future in the mobile hotspot of the Far East may suddenly be looking brighter than ever.

It is no secret that although the Chinese market is flooded with cheaper local alternatives offering a whole lot of lucrative features, the iPhone continues to be a much desired status symbol in that country. The problem is that even then its not able to reach out to the majority of Chinese customers, thanks to years of failed negotiations between Apple and the nation’s largest carrier, China Mobile (NYSE: CHL). All these years, China Mobile and Apple have failed to collaborate, largely due to subsidy-related issues and the former’s demand for a share of App Store-related sales conducted on its network, both of which remain unacceptable to Apple. Both have held their own ground – Apple with the iPhone’s massive popularity and China Mobile with its eye-popping subscriber base. But now, what may finally tilt the scales in Apple’s favor is the ‘3G’ factor.

It has become increasingly apparent in recent years that China Mobile is simply losing traction in the 3G bandwidth playout in China, and rivals China Unicom (NYSE: CHU) and China Telecom (NYSE: CHA) are fast moving up the ladder. With around 704 million subscribers in its kitty, China Mobile is admittedly the nation’s largest wireless carrier. But, here’s the bad news. Out of this huge figure, customers subscribing to its 3G network make up a measly 79 million. One distinct reason for this poor showing is China Mobile’s proprietary TD-SCDMA technology for the 3G bandwidth, something which the majority of handsets being offered are incompatible with. On the other hand, rivals China Unicom and China Telecom deploy more widely accepted W-CDMA and CDMA2000 technology standards.

But, what’s even more alarming is the erosion of the carrier’s existing 3G customer base. As Rob Cihra of Evercore Partners has pointed out recently, China Mobile’s 3G market share has actually gone down by 7%, while the combined share of rivals China Unicom and China Telecom has actually gone up by the same percentage since 2011. While China Mobile is planning to roll out its 4G LTE network to combat the situation, we all know 4G is still very much a thing of the future in a country where the majority of customers are yet to avail 3G services. China Mobile simply needs to smoothen out it 3G technological hiccups to take advantage of the massive potential of a 2G to 3G transition among its customers.

For Apple, the advantages are too obvious to spell out, but here’s a quick recap. With a 65% lion’s share of the market, China Mobile has almost twice the number of subscribers than the combined numbers at China Unicom and China Telecom. Apple knows that even if it manages to tap into 20% of the total 3G subscriber base of China Mobile, that’s going to translate to a potentially whopping figure of 16 million in iPhone 5 sales. The fact that more than 15 million China Mobile subscribers use an iPhone, despite having 2G connectivity, speaks volumes about Cupertino’s popularity.

Well, having said that, everything is not hunky dory for Apple as it seems. Even if China Mobile smoothens out its 3G-related issues and a deal is struck, pricing of the iPhone would continue to be a big deterrent for Apple. Agreed, it’s not battling it out with the slew of low-end smartphones that have flooded the market, but there’s always old rival Samsung and now Nokia (NYSE: NOK) to give it company in the high-end segment. China Mobile and Nokia have reportedly struck a deal to market the new Lumia 920T, which reportedly offer the Finns the first shot at the former’s 3G subscriber base.

What’s more important is that Nokia has tailored their Lumia flagship handset to cater to the Chinese market, which shows their determination to grab a significant market share. And with top smartphone maker Samsung rolling out phones that are selling like hot cakes, Apple may just decide to bend the rules a bit for China Mobile. Add to it the reports circulating about a cheaper iPhone version, and you know it's time to hold on to the stock like crazy. Fool on!             

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

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