Apple's China Factor

Apple's China Factor

Earlier this week, Asymco’s Horrace Dediu wrote a wonderful post about the huge differences between Microsoft and Apple in China. He makes a very strong case for how difficult of a position Microsoft is in. I encourage you to the Asymco post in detail to understand his arguments. Pretty compelling stuff.

Tim Cook was recently quoted in the media as saying he believes China will inevitably become Apple’s largest market. Currently China is their #2 market behind the USA. Asymco predicts that the crossover could happen in 2016 given the incredible strength of Chinese growth for Apple. Seems reasonable to me.

The interesting thing about China is the number of mobile users. Asymco points out that China has 3x as many mobile users as the US. Reports from China’s CNIC show that China had 538 million netizens at the end of June 2012, with 388 million of these being mobile users. That leaves only 150 million PC users. Obviously mobile use is growing tremendously, while PC growth is not.

So that’s where things stand right now. But will Microsoft be able to make a dent in the market with Windows Phone? Often, I find a good indicator of success comes from Google Trends. This is Google’s tool to measure search queries on certain phrases. So I compared the term “iPhone” to various Microsoft-centric keywords like “Windows Phone”, “Windows 8” and “Windows8”. It’s pretty obvious that either nobody in China wants Microsoft powered phones, or they just aren’t searching for information about them using Google.

We’ve all heard the claims that the world is moving towards mobile computing. I think it’s true, but I certainly have no plans to throw away my Macbook Pro. I wouldn’t be happy with just iOS (or Android, or BlackBerry 10, or whatever). But in developing markets I think the transition is happening much faster. Mobile devices are cheaper, always connected, and (obviously) portable. The majority of Internet connections in China are already mobile. This means app development will concentrate towards this larger user base. In emerging markets, I think it’s fair to say that the traditional PC market is dead.

This is what leads me to believe Apple will build a less expensive iPhone. I have no idea if the rumours of a this-year launch are right or wrong. But I do believe it makes great sense for Apple to capitalize on its strong position by taking its price point down somewhat. We’ll just have to wait and see when and if it happens.

If Apple can launch lower-cost (and presumably lower spec) devices specifically in emerging markets, meaning they are not available in the USA or other developed markets, I think it will really help overall sales and profitability. I’m not saying they need to be sub-$200, but I do think Apple can’t maximize profitability at $600+ in China and other markets.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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There are 8 comments. Add yours.

pepsijosh says:

I don't think Apple needs a cheaper device; what they need is an iPad with a stripped down version of OSX, in the same way that Microsoft has developed Windows RT verson of Windows 8.

EgoAttack says:

If your suggestion is work, Microsoft Surface already sold like a hotcake and won't be worst like this.

SockRolid says:

Re: "... either nobody in China wants Microsoft powered phones, or they just aren’t searching for information about them using Google."

I think it's both. First, Apple has huge mindshare in China. Microsoft does not.

Second, we all know how poorly Google has done in mainland China. Google search never had more than 29% of search engine market share in China. Baidu being #1 (with more than 50%?) of course.

Re: "But I do believe it makes great sense for Apple to capitalize on its strong position by taking its price point down somewhat."

Agree. Especially if Apple can do that without starting a massive gray market export business shipping the lower-cost iPhones to cheapskates around the world. And how can Apple do that? By cutting that elusive deal with China Mobile with its 703 million subscribers. With a lower-cost iPhone that works only on China Mobile's oddball variant of 3G (and later their oddball variant of 4G). Won't work anywhere else. Zero gray market.

Later, Apple could ship a world-ready variant of that lower-cost iPhone. If it makes business sense (i.e. if it won't cannibalize sales of the higher-margin iPhone too much.) And I think it could, if the lower-cost iPhone has a smaller screen. And how could it have a smaller screen and still be "Retina"? By the same screen technology as the Retina iPad mini. But that's a different thread, isn't it?

SockRolid says:

One more thing. Get ready for a lot of "if's" here.

If Apple cuts a deal with China Mobile, and if the deal is for a lower-cost China-Mobile-only iPhone, and if there are big sales numbers ...

... then maybe, just maybe China Mobile will ask Apple to create a variant of the latest "normal" iPhone for them. If there's enough demand for a full-featured "normal" iPhone. Especially if the lower-cost iPhone has a smaller screen. Whew.

Premium1 says:

well unless they got the "normal" iphone how would they know what sales would be like? I mean a cheap phone selling doesnt mean much since it could have a lot to do with the cost and not the phone itself.

mts1711 says:

That is BS mr.Umiastowski. WP by default is using Bing and not Google

mazzmoney95 says:

how much money does a 3.5 inch qHD screen cost? qHD isnt anything special so I'd imagine it being cheaper. The put in all the specs of the newest iPod Touch (a5 processor, 5mp camera, etc).
All that for about $400 shouldn be THAT hard for apple.