Apple and China Mobile: Why bulls and bears are both wrong

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Apple ( AAPL , quote ) and China Mobile ( CHL , quote ) have both received a lot of press recently pertaining to a potential agreement over the iPhone. Both bullish and bearish perspectives are missing the mark however, when it comes to the world's largest mobile phone market.

[caption id="attachment_65572" align="alignright" width="300" caption="The iconic Apple store in Shanghai's Pudong district"] Image Courtesy Robert (kwramm): http://www.flickr.com/people/29075182@N08/ [/caption]

As the result of the stock's recent wild fluctuations, Apple had dominated the punditsphere over the past few weeks. After its 6%+ slide earlier in the week, commentators were citing a number of potential reasons for the plunge: selling before new capital gains taxes take effect, new margin requirements, and worries about Apple's position in China.

While the former two scenarios are quite plausible, the latter is based on superficial conclusions. Many market observers cited a Reuters report that Apple had slipped into sixth place in the Chinese smartphone market. Although true, this drop had been predicted by most who closely observe the market.

The drop in market share is actually little reason to fret, given that the number of Apple iPhones sold in the country, as confirmed by iPhone 5 pre-orders , continues to climb on an annualized basis. Apple is losing share in China's smartphone segment simply because the low end of the smartphone sector has exploded ( up to 60 million last quarter ) and many handsets are now reasonably priced for China's vast working class.

Whereas a few years ago, 1000 RMB ($160) might get you a phone on which "Snake" was the height of gaming, now, that same amount can fetch a ZTE, Huawei, or Coolpad (and, come on, who doesn't want a Coolpad?) low-end smartphone equipped with Angry Birds. Importantly, these aren't customers that Apple was courting in the first place. In the high-end market, Apple's only real competition remains Samsung.

What of the second piece of misleading news from the bearish camp - a report that China Mobile had agreed to a deal with Nokia to carry the Finnish firm's latest high-end offering. Some pundits argued this means an Apple/China Mobile deal would not come to fruition, which is absurd. Most mobile phone carriers around the world offer multiple brands from which their customers can choose, and it's unreasonable to think that China Mobile wouldn't offer the iPhone because they are also selling the Lumia 920T.

However, you should pay attention to how Apple and China Mobile come to terms over the App Store. Remarks from China Mobile indicate the firm wants a piece of the action from the App Store , but Apple is hesitant to give in for fear other carriers around the world would want a similar deal.

My opinion is that a deal will come to fruition at some point -- probably next year, as both sides do stand to gain from such an accord. However, the bullish Apple camp has probably over-hyped the importance of any deal. You would think that access to the almost 700 million China Mobile customers would be a boon for the company. Not quite.

Why? The majority of people who want or have wanted an iPhone are not waiting until it becomes available (and fully-functional) on China Mobile's network. Millions have already switched to China Unicom ( CHU , quote ) and China Telecom ( CHA , quote ) in order to obtain a fully-functioning iPhone. More than 15 million people already own an iPhone on the China Mobile network, although because of chip limitations, the phone only has 2G capability on this network. The majority of China Mobile users are unable to afford the 4,500 RMB ($720) price tag for an iPhone 4S. While a deal would probably help sales incrementally, it would not be the windfall many pundits make it out to be.

This is not to imply that Apple's future in China is not bright. A China Mobile deal is just not the main catalyst for Apple to increase its raw numbers in China. Rather, in addition to organic growth as younger Chinese grow wealthier and can afford Apple wares, the iPhone 5 and its Chinese functionality is what has the potential to move the proverbial needle.

While Apple has already won over the cosmopolitan women of Beijing and Shanghai , it hasn't won over the businessmen of Guangdong, Jiangsu, and Zhejiang. Because previous iterations of Samsung phones had far better Chinese functionality, businessmen outside of first-tier cities have not come to the iPhone en masse. Given that Apple emphasized the iPhone's Chinese functionality in its latest iteration, this could help Apple obtain a new swathe of customers outside of the urban chic set.

In sum, the pullback in Apple could very well be an opportunity. But if you're going to go long or short Apple based on a China-related thesis, make sure you know the full story.

Disclosure: Author and family are long AAPL and CHL

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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