Apple Inc. (AAPL): Can Emerging Markets Save This Sinking Ship?

For many years, Apple Inc. (NASDAQ:AAPL) has been known for innovation in its products like the iPhone, which allowed it to charge premium prices for its merchandise. But with the availability of cheaper smartphones in the market, the company is facing issues in maintaining its premium brand image. Investors are worried whether or not the company will be able to repeat the same success of Steve Jobs era. This concern has shown reflection in the company’s stock price, which has declined more than 15% year to date in contrast to S&P 500, which has experienced growth of around 13%.

In the second quarter, Apple Inc. (NASDAQ:AAPL)’s margin declined to 37.5% from 47% year-over-year. This decline is considered a sign of becoming the victim of “Smartphone Commoditization.” The company is experiencing higher sales of iPhone 4 in comparison to the higher-priced iPhone 5 as the market for high-end smartphones is saturated. It will also launch the iPhone 5S and a cheaper version of iPhone in the fourth quarter, causing some consumers to delay their purchase of the higher-end version.

Emerging market focus – opportunity or threat?

Going forward, emerging markets will be the key driver of global smartphone growth. According to Nomura, smartphone shipments will reach to 1.42 billion units in 2016, up from 0.95 billion units in 2013. It is estimated that around 75% of this growth will come from the Asia-Pacific region. Apple Inc. (NASDAQ:AAPL) has around 12% market share in this region, against 31% in developed countries. In order to tap this market, Apple is focusing on bringing in a low-end iPhone.

Apple will face issues in targeting the larger Asian market because of its smaller screen design. The high-end Asian smartphone market is dominated by phones with five-inch screens, which reduce packaging complexity and make the smartphones available for less than $250. As Apple Inc. (NASDAQ:AAPL) is not willing to launch a five-inch smartphone before 2014, it will have to face intense pricing competition.

What’s with the cheaper iPhone strategy?

Apple is most likely to launch a mid-range smartphone in September for $350. I don’t think this will be a successful strategy for the company. This iPhone is expected to have a profit margin of around 27% to 35%, against the average margin of more than 40% that the company enjoys with the current iPhones. This iPhone should follow the lead of iPad mini, with very slight changes in features and price. As a result, it will start grabbing market share from high-end iPhones and will cause one-third of the high-end iPhone customers to shift to the cheaper version.