Apple Inc. (NASDAQ:AAPL) has tried to pursue a distribution deal with Chinese telecom operator China Mobile Ltd. (ADR) (NYSE:CHL) since 2009, but both companies have yet come to an agreement because of conflicting business models. Investors have watched Apple’s sales growth in China suffer against low-priced smartphones this year. A partnership with China Mobile Ltd. (ADR) (NYSE:CHL) offers Apple Inc. (NASDAQ:AAPL) a large distribution channel to attract new consumers, while China Mobile can expand its 3G subscriber base ahead of local telecom rivals with iOS products.
In the second quarter, smartphone vendors shipped about 238.1 million smartphones globally, up 50% from 158.3 million in the year-ago quarter, according to estimates from Canalys. China accounted for 37% of worldwide shipments, about 88.1 million smartphones, making it the world’s largest smartphone market by volume.
|Vendor||Shipments (millions)||Market share (%)|
This chart illustrates Q2 2013 smartphone data. Source: International Business Times
Apple Inc. (NASDAQ:AAPL) has struggled to gain momentum in the Chinese market over the past year. China’s smartphone growth is coming from mid- to low-end price segments, making it difficult for Apple to penetrate with its premium device. Apple’s market share in China halved to 4.8% from 9% a year-ago — its lowest percentage of market share since the fourth quarter of 2010.
For years, Apple Inc. (NASDAQ:AAPL) has strongly focused on the premium smartphone segment, while Samsung and Chinese vendors sell smartphones in various price segments to serve different consumers and needs. Reuters, in June, reported that Apple is interested in developing a cheaper iPhone model, which is now rumored to be the iPhone 5C. Such a move poses the risk of reducing gross margins and cannibalizing premium iPhones, but analysts believe Apple needs to launch a lower-priced iPhone to compete and bolster growth in developing markets.
Samsung remained the top smartphone vendor in China with 17.6% market share on 15.5 million smartphone shipments. Globally, Samsung and Apple Inc. (NASDAQ:AAPL) showed 55% and 20% growth, respectively, although they lost global market share to Chinese vendors. Chinese vendors collected 20% of the global smartphone market in the second quarter.
Seoul, South Korea-based Samsung has identified and adjusted its marketing focus on the rapid growth in China’s smartphone market, particularly the mid- to low-end segment. According to Antonio Wang, an analyst at IDC China, Samsung has shifted from competing to preserving its market share in the Chinese higher-end smartphone market against premium phone makers such as Apple.
Samsung has begun to “strive for market for products under $200, which has so far been dominated by domestic brands. However, Apple leverages the incentive policies for channels to inspire the shipments of iPhone 4, further expanding its user base,” Mr. Wang said. Samsung’s new strategic move aims to recover lost sales and share from Chinese brands, while distancing itself further from Apple with new budget smartphones for price sensitive consumers.
China Mobile partnership
Tim Cook traveled to Beijing earlier this month to sit down with China Mobile Ltd. (ADR) (NYSE:CHL)’s Chairman Xi Guohua to discuss matters of cooperation. Government-owned China Mobile is the world’s largest mobile carrier with 740 million subscribers, which makes up 55% of China’s population. All of the top five vendors in China are available under China Mobile. Unlike local carriers China Telecom and China Unicom, China Mobile does not distribute iPhones.
Apple has been in talks with China Mobile Ltd. (ADR) (NYSE:CHL) since 2009, but both companies have yet to agree on price, subsidy amounts, and revenue sharing. At the 2012 China Mobile Worldwide Developer Conference, Li Yue, president of China Mobile, discussed issues that have prevented his company from reaching a deal with Apple. “Technology is not a problem. It’s mainly about business model and benefit-sharing issues,” he said to an audience.
How can Apple benefit from a China Mobile partnership?
Apple currently does not offer an iPhone compatible with China Mobile Ltd. (ADR) (NYSE:CHL)’s TD-SCDMA 3G network. Apple would need to develop a compatible iPhone for China Mobile in order to access 740 million new customers. An agreement allows Apple to tap into a broader distribution channel to deliver products faster to end-users to meet consumer demand. Apple’s premium brand would lure users from competitors, adding significant pressure on Chinese vendors’ sales growth.
Greater China accounted for 13% of Apple’s revenue in the second quarter. Greater China includes China, Hong Kong, and Taiwan. Apple’s sales in Greater China plummeted 43% from the previous quarter and fell 14% from the same quarter last year. A deal with China Mobile would optimize sales and recover market share from Chinese vendors going forward.
How can China Mobile benefit from an Apple partnership?
China Mobile has recorded low user adoption of its 3G network. China Mobile has about 137 million 3G users, which represents less than 20% of the company’s subscriber base. This compares to China Unicom and China Telecom that boast 38% and 50% 3G adoption, respectively. Apple would improve China Mobile’s 3G adoption with its devices, while attracting a larger-volume of 3G users to the carrier’s high-revenue data plans. Apple has access to over 350 million subscribers through China Telecom and China Unicom. Both have profited on Apple’s iPhone models, and China Mobile has the lucrative opportunity to do the same.
In recent quarters, Apple has faced stiff competition in the Chinese mobile market from Samsung and Chinese smartphone makers. A distribution deal with China Mobile could improve Apple’s sales and market share in the Greater China smartphone market. China is an important market that Apple should not ignore. IDC predicts smartphone shipments in China will exceed 460 million units by 2017, and reach a market size of $117.8 billion.
Apple is expected to announce its next new iPhone at a special event on Sept. 10, according to AllThingsD. Analysts anticipate the long-awaited budget iPhone for developing markets and such a device could help the company crack the code in China.
The article Apple Drops in China, China Mobile Looms originally appeared on Fool.com and is written by Christopher DeSousa.
Christopher DeSousa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile.
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