Apple’s Fortunes Lie Behind the Great Wall: Part I
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Perhaps no market is as ripe for growth as China and its population of over 1.3 billion people. Officially the 92nd richest country in the world in per capita terms, wealth has been growing at an annual rate of 10.3 percent over the past decade. Millions of Chinese enter into the middle class each year, which has fueled domestic technology consumption at a massive rate. In 2012 alone, it is estimated that domestic spending on smartphones, tablets, PCs, TVs, and other tech goods will eclipse ¥7.7 trillion, or about $120 billion; annual growth will average 12 percent through 2016. First thoughts immediately turn to the king of this industry, Apple (NASDAQ: AAPL). While China obviously presents an enormous opportunity for the tech giant, is domination – in the western sense – necessary for its survival into the next say, ten to twenty years?
Siri can speak Mandarin; Youtube is now Youku, and more.
Upon first hearing of the happenings of the company’s Worldwide Developers Conference earlier this month, my thoughts immediately turned to jealousy. The buzz was surrounding Apple’s China-specific features for the new OSX Mountain Lion. For a split second, I wished that I could have an operating system with America-specific features, until my common sense, albeit delayed, shared with me that Apple products had always been tailored to my culture. Regarding the OSX, which will be released with the new MacBook Pro, execs shared a few interesting tidbits. Linguistically speaking, Siri has been upgraded to understand China’s two primary languages – Mandarin and Cantonese. This was a welcome addition to the artificial intelligence’s library of just 4 languages, which had already included Japanese. The OSX also comes with improved handwriting recognition, to better detect the complexities of Chinese’s calligraphic nature.
More importantly, at least from a techie’s perspective, Apple announced that the OSX Mountain Lion would be synced with a host of popular Chinese web services. The company is hoping that this move will boost its ‘niche’-like share of the country’s PC market, which currently rests around 6 percent, behind competitors like Hewlett-Packard (NYSE: HPQ) and Acer. The popular blogging network Sina Weibo has received its own interface on the Mac’s home screen, and video sharing sites Youku and Todu are now integrated with Apple media features. Aside from catering to Chinese users’ homegrown favorites, this intertwined functionality deals a slight blow to Google (NASDAQ: GOOG), as YouTube had began to be offered censor-free in some provinces earlier this year. At the Developers Conference, senior VP Craig Federighi also urged app developers to “get [their] apps ready for China.” The overwhelming majority of Apple-centric apps are made for the iPhone and iPad, which brings us to our next point.
The success of the iPhone and iPad in China may determine if Apple is great, or merely good over the next decade.
Apple fanboys hear me out – I am not saying that the health of the company completely rides on its integration into the Far East. On the contrary, Apple’s revenues would continue to grow, and shares of AAPL would still be a decent investment even if the company pulled out of the People’s Republic tomorrow. Currently, 80 percent of the company’s revenues come from outside of the region; these streams have grown by 45.7 percent over the past four quarters to surpass $30 billion in the first three months of 2012. Apple’s footprint in China, though, has been growing much more rapidly, eclipsing $7.9 billion last quarter after amounting to only $2.6 billion one year earlier. According to the company’s most recent 10-Q, this growth was driven by increased demand for the company’s smartphones, most notably due to the “successful launch of the iPhone 4S in mainland China.”
Despite these advances, Apple still plays second fiddle to Samsung in this region, as the South Korean-based company accounts for 28 percent of the Chinese smartphone market compared to Apple’s 19 percent, though this is quite the jump from the 8 percent it held pre-iPhone 4S. Interestingly, these devices are not sold through the country’s largest carrier, China Mobile (NYSE: CHL), whose SCDMA networks are incompatible with the smartphone’s WCDMA capabilities. Though Apple does have agreements with China Unicom (NYSE: CHU) and China Telecom (NYSE: CHA) – smaller telecoms who do not use SCDMA – they are leaving a lot of money on the table by not adapting to China Mobile, which services 70 percent of the country’s phone-carrying subscribers. Yes, an estimated 15 million CHL customers are devoted enough to use the iPhone on Wi-Fi only, though this is a fraction of the company’s total user base of 660 million. Not surprisingly, rumors of talks between the two companies have been swirling, and an agreement could come with the release of the iPhone 5 later this year. Investors would be wise to monitor this situation ardently, as a deal between Apple and China Mobile would be beneficial to both sides.
In the second part of this article, the iPad's fate in China will be discussed, along with the Apple black market, which is less ominous than it sounds. Finally, we'll take a look at the surprising metrics that suggest shares of AAPL are undervalued at the moment.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Apple, China Mobile, and Google. Motley Fool newsletter services recommend Apple, China Mobile, and Google. 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.If you have questions about this post or the Fool’s blog network, click here for information.