) expects China to become its largest market in the near future.
In a recent interview with the Chinese Xinhua news agency,
Apple's Chief Executive Officer Tim Cook expressed this
On his second visit to China in less than a year, Cook met
Chinese regulators and partners. He also met the
) Chairman Xi Guohua, which is significant considering the fact
that Apple is looking to build a partnership with the company for
selling iPhones in China.
China has become an important market for Apple as the company
continues to look for growth opportunities outside the U.S. and
the Euro zone. According to IDC, smartphone shipments in China
hit a new record with the addition of more than 60 million
customers in the third quarter of 2012. On the other hand, the 3G
penetration rate was just 20.0% of the total mobile subscriber
base, which reflects significant growth opportunity, in our
Currently, China along with the U.S. contributes more than 10%
of Apple's revenue. Apple has 11 stores in China and Hong Kong.
Revenues from China jumped 82.8% year over year to $22.79 billion
in fiscal 2012. Apple noted that the growth was primarily driven
by higher demand for its products among the affluent middle class
However, Apple's market share in China has declined
significantly in recent times. According to market research firm
IDC, Apple's smartphone market share was under 10% in the third
quarter of 2012. Apple was placed at #6, down from #4 in the
previous quarter. Samsung topped the list followed by Lenovo
(#2), local handset maker Coolpad (#3), ZTE Corp (#4) and Huawei
Recently, Finnish handset maker
) announced a partnership with China Mobile to sell Lumia 920T at
a comparatively lower cost in China. This will further increase
competition for Apple going forward.
Currently, Apple offers iPhone through partnerships with China
Unicom Ltd and China Telecom Corp. However, both of them have a
significantly lower subscriber base than China Mobile, which is
million) and has more than 64% of mobile market share in
Although China Mobile and Apple have been discussing the
chances of a prospective deal for some time, the telecom
carrier's incompatible third generation (3G) network prevented it
from offering iPhone in China. However, China Mobile's latest 4G
network (TD-LTE) is ready and is expected to be launched
nationwide by the end of 2013.
We believe that the removal of this technical obstacle will
help the companies to forge a partnership quickly. Recently,
China Mobile announced that it had set a target of selling 100
million mobile phones in 2013. A potential deal with Apple was
looked upon as the primary driver behind this aggressive
According to Bloomberg, China Mobile also said that both the
companies needed to agree on "benefit-sharing" before it could
start offering iPhone in China. Although the outcome of the
recent meeting between Cook and Xi Guohua is yet to be known, we
believe that Apple needs to partner China Mobile in order to
boost its sagging market share in China.
Apple is known as a hard bargainer. However, we believe that
the increasing competition in the Chinese smartphone market and
China Mobile's massive subscriber base will compel the iPhone
maker to soften its stance.
Apple recently rejected the rumors of a low cost iPhone for
the Chinese market However, we continue to believe that Apple's
ability to innovate and grow in China, where the market is more
cost-sensitive, will determine the company's fortunes over the
We maintain our Neutral recommendation over the long term
(6-12 months). Currently, Apple has a Zacks Rank #3 (Hold).
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