Analyst Angle: China Set To Boost Apple’s Global iPhone Sales, But Competition Likely To Be Strong

After months of speculations, Apple iPhone 3G S is about to make its “official” entry in the Chinese market, following China Unicom’s announcement of a three-year deal with Apple to sell the watershed device in China in 4Q. Through this deal, and while Apple is set to face several issues in the coming months, the giant tech company is set to make a big splash in the Chinese market, which has become the largest handset market in the world, with 670 million+ wireless subscribers, according to the Ministry of Information Industry.
1.Two iPhone models set to be available, but no Wi-Fi allowed. China Unicom allegedly plans to offer two iPhone 3G S models at a higher price than in the U.S.: The 16GB iPhone version for $702 and the 8GB version for $351. Apparently, China Unicom paid Apple $292 per unit for both models. Of note, a two-year service contract is required for both models. Interestingly, while China has an extensive Wi-Fi network, Wi-Fi will probably be disabled on the iPhone 3G S. For the Chinese market, Apple created a special version (A1324 model) of the iPhone, which can support GSM, GPRS, EDGE, and W-CMDA. Apple has made significant concessions to get this deal done as it also agreed to drop its traditional revenue-sharing model. Chinese Unicom will apparently pay Apple based on the number of iPhones sold. On the other hand, China Unicom, which already pre-ordered 5 million iPhones, has allegedly guaranteed to sell up to 2 million iPhones a year, representing potential sales of at least ($730 Million) for Apple, according to TMT China.
2. Chinese Market presents huge revenue opportunity for Apple, driven by high-income wireless subscribers. China being home to more millionaires (364k) than the UK, according to the latest World Wealth Report, the Apple iPhone 3G S is likely to appeal to many high-income Chinese customers. I was told one day that there were about 200 million Chinese whose income is equivalent to the one of most middle-class Americans. Granted, the iPhone will be out of reach to most Chinese, but the potential demand is clearly there. With 22 million iPhones sold worldwide, the Chinese market, which is now moving full speed toward 3G, presents tremendous opportunities for Apple. So far, the iPhone 3G S has only been shipped in 18 countries. China Unicom, which is scheduled to roll out its 3G network on Sept. 28, plans to have 6.5 million iPhone users by February, which would represent ~5% of its existing customer base of 140 million wireless subscribers. By comparison, two years after the launch of the iPhone in the U.S, the iPhone represents 11% of AT&T’s customer base. Granted, China Unicom has almost twice has many wireless subscribers as AT&T, which is a big help, but this demonstrates the tremendous growth potential of the iPhone in China.
3. China Mobile was probably Apple’s first choice, just like Verizon was Apple’s first choice two years ago for the U.S market. I truly believe that Apple wanted to sign an exclusive contract with China Mobile for the iPhone based on the carrier’s large customer base (457 million subs for China Mobile vs. only 140 million subs for China Unicom). Quite frankly, this situation reminds me of what happened a few years ago in the U.S. when Apple came to Verizon to offer the iPhone to the carrier.
In order to win the deal, China Unicom has agreed to let Apple pre-install iTunes on the iPhone, a condition China Mobile would not accept, according to the Shanghai Securities News. Like Verizon, China Mobile probably wanted to keep control of its distribution channel, which probably conflicted with Apple’s own agenda. China Unicom is allegedly discussing nationwide iPhone distribution with several Chinese retailers, which seems to indicate that Apple will be selling the iPhone through its own Apple stores and China Unicom’s resellers. But most importantly, China Mobile will allow Apple’s competing mobile app stores to run on its network, which is something that Apple was probably not happy about. In my opinion, both parties soon realized that it was not going to work out. Apple quickly turned to plan B (China Unicom), and so did China Mobile. There were just too many conflicts of interest between the two giant companies at the moment. In fact, according to TMT China, the discussions between both parties have been over for two months. In my opinion, China Unicom’s three-year exclusive deal with Apple was a big blow to China Mobile based on China Mobile’s dominance in the Chinese market and current momentum. However, Apple, which is progressively changing its model from exclusive carrier deals to multiple carrier deals within each country, according to a report from Piper Jaffray, already confirmed that its deal with China Unicom was not an exclusive one. So an iPhone deal between China Mobile and Apple might still be possible in the coming years.
4. But competition is set to be fierce in the coming months. While the iPhone is set to gain good traction than the Chinese smartphone market based on Apple’s strong brand and current momentum, Apple will face fierce competition from many players, especially from Nokia, which currently dominates the Chinese handset and smartphone markets. Samsung, which ranks second in the Chinese handset market, will also be a serious competitor. Motorola, which is the second-biggest player in the Chinese smartphone market, will also be one of Apple’s toughest competitors. In the smartphone market, Apple will also face competition from Dopod, Dell, Sony Ericsson, as well as HTC, which will supply TD-SCDMA phones to China Mobile, and RIM and Palm, which are allegedly in discussions with China Telecom to offer their flagship products. Of note, Dell, Lenovo, and Dopod will supply China Mobile with OPhones, China Mobile’s new brand.
Apple will also face tough competition in the mobile app store space, especially from China Mobile, which recently launched its own mobile app store (Mobile Market). Of note, China Mobile will offer its mobile apps and services are available at no cost to users until the end of September, which should help its mobile app store gain good traction. Although China Mobile’s mobile app store only offers 4,000+ apps at the moment (vs. 65,000 for Apple), China Mobile is well-positioned to become a serious player as it can leverage its extensive relationships with mobile app providers. China Mobile’s mobile app store also has the advantage of supporting various devices (10 smartphone models, from LG, Samsung, Nokia, Samsung, Dopod and Dell, currently support China Mobile’s mobile app store) and mobile OSes. Plus China Mobile’s mobile app store is likely to appeal to many mobile app developers as it can run on various mobile OSes. But most importantly, China Mobile can provide mobile app developers with a global reach now that the carrier joined the Joint Innovation Lab (JIL), a group of carriers (Verizon, Softbank, Vodafone, etc) which aims at harmonizing various mobile app stores and creating standards for web-based mobile apps (widgets). In this space, Apple is also set to face tough competition from Nokia (Ovi store), Google/Android, RIM, LG, Microsoft, and Samsung, among others. Can China Mobile rise to the challenge and get to 65,000+ apps like Apple? That’s not out of reach, but it will take some time. However, as China Mobile starts to add more mobile apps, and introduce more capable and affordable 3G smartphones, the carrier could soon be up to the challenge.
5. Unlocked iPhones and knockoffs already available, but out of reach for most Chinese, and unlikely to impact iPhone sales. Chinese people did not wait to get their hands on the iPhones. In fact, several reports indicate that between 1 million and 2 million unlocked iPhones from the U.S. or Hong Kong are already available in China. However, it comes at a price, as unlocked iPhone can be purchased anywhere from $580 up to $810, which is average salary of most Chinese white collars over a five-year period. Existing China Mobile and China Unicom customers can use those handsets simply by putt
ing their SIM card in th
e unlocked device, but can’t have access to 3G services, which is a major drawback. Knockoffs are also popping up everywhere. If you walk around in the street of Beijing, you will probably see people selling counterfeits (e.g. iOrgane, HiPhone, iPhone Mini, etc.). This is not unusual in China, where knockoffs represent a low-barrier entry to the high-end smartphone market for many Chinese. It also represents a status symbol for many low-income Chinese. Of note, the emergence of knockoffs started when the first iPhone came out in the U.S. in 2007. Although copycat iPhones are usually available for a quarter of the price of an unlocked phone, those devices are unlikely to have a major impact on the real iPhone as they are not that popular in China and are just wash-down versions of the real iPhone.
Bottom line: If all goes well, the Chinese smartphone market could be an instant home run for Apple, which has kept an eye on the Chinese market since the launch of its first iPhone in 2007. With 22 million iPhones sold worldwide, the Chinese market, which is now moving full speed toward the 3G revolution, could boost Apple’s iPhone sales globally, and provide upsides to Apple’s future estimates, especially as other Chinese carriers adopt the iPhone in the coming years. However, China Mobile, Nokia, Samsung, LG, Motorola, RIM, HTC, Dell, among others, are set to become fierce competitors for Apple in the Chinese market. At the end of the day, the iPhone 3G S could stimulate innovation in the Chinese smartphone market, and set the bar higher in terms of mobile user experience in China.