AAPL: Apple Should Bear Fruit on Chinese Soil … For a While

by James Brumley | January 13, 2014 12:06 pm

AAPL: Apple Should Bear Fruit on Chinese Soil … For a While

It’s no secret that Apple (AAPL[1]) wants to develop a strong presence in the Chinese consumer market. But it’s unlikely that anyone would have foreseen the approach Apple decided to take in its effort to penetrate that market of 1.2 billion potential customers. As of last week, Apple’s iPads, iPhones and MacBooks are available through a third-party store at an Alibaba online mall[2] — called Tmall — that targets the very Chinese consumers AAPL has had in its sites for a while.AppleLogo AAPL: Apple Should Bear Fruit on Chinese Soil ... For a While

For those who know Apple well, it’s an odd decision in that AAPL traditionally has been meticulous about how its products are sold. Apple prefers to control the entire sales process, a la its retail stores, but barring that, its telecom partners will do.

But to entirely turn the keys over to someone else (a 100% online retailer, no less) is new territory that might raise a few eyebrows.

Is it a good idea, all in the name of boosting AAPL stock by capitalizing on China’s growing mobile-oriented market? Not necessarily, but to fully answer the question, one has to take a step back and look at Apple’s bigger China strategy.

A Market Worth Apple’s Effort

Just for the record, Apple was already positioned to gain a decent foothold in China. Near the end of last year, the world’s most notorious smartphone maker finally hammered out a deal with China Mobile (CHL[3]) that added the iPhone the the carrier’s menu of phones it offered customers[4].

It’s a big deal because China Mobile is China’s largest cell phone service provider, boasting a customer base of 760 million[5]. For comparison, there are 240 million mobile subscribers in the United States, and a little more than half of the mobile phones being used are smartphones. China already has 246 million smartphone users[6], so the growth prospects there spell big opportunity for AAPL stock.

Although the iPhone was already available through China’s other two major carriers, China Telecom (CHA[7]) and China Unicom (CHU[8]), CHA and CHU only have 433 million wireless customers between them. China Mobile was the proverbial big Kahuna in China, and should drive a noticeable bump in China’s iPhone sales when the carrier makes them available beginning on Jan. 17.

But AAPL wasn’t solely relying on China’s wireless carriers to open up the market.

While AT&T (T[9]) and Verizon (VZ[10]) struggle to keep iPhones in stock due to strong consumer demand for the iconic brand, Apple mania doesn’t quite exist in China the way it does in the U.S. There are too many other well-liked brands there, like the market-leading Samsung[11]. Lenovo holds the No. 2 spot in China, and Apple is third with a market share of 12% as of October.

To stir up demand from the consumer side of things, Apple has opened 10 retail stores in China, the latest of which just opened Friday in Beijing’s Chaoyang District.

The “pushing” strategy through AAPL’s own direct retail efforts in China, in addition to the “pulling” effort supplied by China Unicom and China Telecom, have basically worked, too. Sales of mobile devices in China, Hong Kong and Taiwan now account for 15% of Apple’s total revenue[12], whereas the region only drove about half that proportion a few years ago.

The addition of China Mobile as a partner is expected by some to add sales of an extra 15 million to 20 million iPhones this year alone (vs. an annual pace of about 23 million through China Unicom and China Telecom[13]), bringing Apple’s market share of China’s smartphone market to about a third of the total 240,000 million smartphone users. That’s big, but not an unreasonable outlook judging from the response to the iPhone in Japan,[14] where Apple owns about a third of the smaller nation’s smartphone market.

AAPL Out of Big Partner Prospects

With all of that being said, getting China Mobile on board is a bittersweet milestone for Apple and its investors.

Yes, it was the big outlet Apple needed to make China fully worth the effort in terms of penetration, but China Mobile was the last of the major carriers in the world that wasn’t yet promoting Apple’s products.

See, all the major wireless service providers in the United States, as well as Europe, have been offering the iPhone for a while, and although the response has been amazingly strong, saturation and the ensuing slowing-growth rate it causes is becoming a problem in the much more mature U.S. and European markets.

Indeed, Apple’s market share in Europe shrunk by 6.5% in Europe late last year, and fell by 9.9% in the United States for the same three-month period of 2013, according to data from CNET[15]. Apple’s market share in China is apt to hit a similar wall a couple of years from now.

Point being, Apple has little left for a revenue encore on the partnership front now that the China Mobile deal has been inked.

As for the Tmall store, it remains to be seen whether China’s consumers are willing to shell out big bucks — sight unseen — to an online reseller for an Apple device. Consumers still will need to find a wireless service provider in order to make the iPhone work, so why not simply buy said phone from the carrier itself? In fact, odds are good that shoppers will find a better deal through one of the carriers, who are now forced to compete with one another on the selling price of the iPhone[16].

And as for MacBooks, iPods and iPads being available through Tmall … well, while China is warming up to online shopping, Best Buy (BBY[17]) learned the hard way that China’s technology consumers also love to browse/rummage through stores[18]. Or, barring that, a visit to one of Apple’s retail stores in China may be preferable to an online purchase.

Oh, AAPL certainly will find some success via the Chinese shopping site, as electronics seem to be one of the more popular categories for the online shopping mall. But it’s tough to imagine Apple will sell millions and millions of their devices via Tmall, especially at the premium prices Apple generally expects.

Bottom Line

Yes, 2014 could be a very good year for AAPL stock, mostly thanks to new partner China Mobile, and less in part to its presence at Tmall. If Apple can reach the high end of its Chinese iPhone sales outlook of 20 million units this year, that translates into additional revenue of around $9 billion and an extra $3 per share in earnings for 2014, at least according to Sanford Bernstein’s Toni Saccanaghi[19]. The following year should be a good one as well, as China Mobile continues to drive Apple’s penetration into China.

Beyond 2015, though, AAPL has few options left for simple revenue growth. Apple will then once again have to rely solely on product innovation to drive the big growth that shareholders have come to expect … and innovation hasn’t exactly been Tim Cook’s strong suit.

It could be a good two years between now and then, however.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. available through a third-party store at an Alibaba online mall: http://blogs.wsj.com/digits/2014/01/07/apple-opens-store-on-alibabas-tmall/
  3. CHL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHL
  4. added the iPhone the the carrier’s menu of phones it offered customers: http://investorplace.com/2013/12/iphones-aapl-apple-stock-china-mobile/#.UtIehbS1XS0
  5. customer base of 760 million: http://www.forbes.com/sites/markrogowsky/2013/12/23/apples-china-mobile-deal-another-move-in-the-chess-game/
  6. 246 million smartphone users: http://www.thejournal.ie/most-smartphones-world-countries-940921-Jun2013/
  7. CHA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHA
  8. CHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHU
  9. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  10. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  11. like the market-leading Samsung: http://www.cnbc.com/id/101266797
  12. now account for 15% of Apple’s total revenue: http://www.fool.com/investing/general/2013/12/14/iphone-to-become-no-1-smartphone-in-china.aspx
  13. vs. an annual pace of about 23 million through China Unicom and China Telecom: http://www.usatoday.com/story/money/business/2013/12/22/apple-reaches-deal-to-bring-iphone-to-china/4168163/
  14. judging from the response to the iPhone in Japan,: http://www.cnbc.com/id/101150307
  15. according to data from CNET: http://wallstcheatsheet.com/stocks/apple-loses-overall-market-share-despite-iphone-sales-boost.html/
  16. forced to compete with one another on the selling price of the iPhone: http://www.ibtimes.com/apple-incs-aapl-fortune-china-rise-china-mobile-chl-rival-carriers-compete-pricing-1529728
  17. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  18. China’s technology consumers also love to browse/rummage through stores: http://investorplace.com/2013/12/american-retailers-in-china/
  19. at least according to Sanford Bernstein’s Toni Saccanaghi: http://www.forbes.com/sites/connieguglielmo/2013/12/23/apple-inks-important-china-mobile-deal-could-sell-17-million-iphones-in-first-year/

Source URL: http://investorplace.com/2014/01/aapl-stock-apple-china/
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