This article is part of our Rising Star Portfolios series.
Investors are well aware of the rising influence of China across the globe. Yet, with a GDP per capita still only about one-tenth the size of the United States', it's been easy for investors to dismiss China as a force in high-priced items like computers.
That'd be a mistake. Last quarter, China passed the United States as the world's largest PC market for the first time. Not only did more PCs ship to the Middle Kingdom, but the sales total was higher as well. Throw in a booming mobile industry and you can see why China's influence on electronics is becoming a key area for tech investors to watch.
An interesting storyline in all this is that many American companies are the ones profiting from growth in China. Here are five (perhaps unexpected) companies seeing a bigger boost from China's electronics spending:
Marvell (Nasdaq: MRVL )
CEO Sehat Sutardja revealed outstanding growth in the second quarter: "First, in our mobile and wireless end market, Q2 revenues increased approximately 18% sequentially, and represented approximately 26% of our overall revenues. The sequential increase was driven by growth from our new products such as TD in China."
Your eyes don't fool you; Marvell managed to increase its mobile and wireless sales by 18% over the previous quarter. That's a stunning rise, and the reason for Marvell's sound earnings beat. The interesting caveat to China's mobile market is that the country deploys a different 3G standard than the rest of the world called TD-SCDMA. Marvell has managed to spring on this opportunity by developing the only single-chip solution built to run on China's unique 3G network.
When I say "single-chip," that essentially means bundling the processor with other chips that handle wireless signals into a single package. In the United States and Europe, Qualcomm (Nasdaq: QCOM ) used the same single-chip methodology to become the mobile processor leader. With little competition in China and smartphone growth exploding, Marvell is staking its own claim in that market. The momentum should continue to rise in coming quarters as Marvell racks up more and more wins.
Apple (Nasdaq: AAPL )
CEO Tim Cook has plainly stated Apple's outstanding numbers:
China was very key to our results. As a reminder, for Greater -- we define Greater China as Mainland China, Hong Kong and Taiwan. Year-over-year it was up over 6 times. And the revenue was approximately $3.8 billion during the quarter, and that makes the year-to-date numbers through the three quarters that we have had thus far around $8.8 billion. So this has been a substantial opportunity for Apple. And I firmly believe that we are just scratching the surface right now.
Despite their low relative incomes, Chinese consumers have latched on to Apple. That shouldn't be too surprising for a few reasons:
- There's a high level of income inequality within the country, so residents living in larger tier 1 and tier 2 cities have far higher incomes that can better support high-cost phones.
- Chinese consumers have shown a propensity to latch onto premium brands. Just look at how fashion designers like Coach have targeted and found success in the market. Apple's seen as an aspirational brand in the country.
- The price difference between the average PC sold in America and China isn't that great. According to researcher IDC, last quarter the average price of a PC sold in China was $643. In the United States it was only slightly higher at $661. Given that PC selling prices are roughly equivalent, there should be ample spending power to fuel adoption of Apple computers as well as phones.
That last point is important because thus far the Apple story within China has mainly centered around the iPhone. However, the newest MacBook Air recently hit the country and early results look very positive. While Apple's sales to China have blown away nearly all estimates so far, if they can gain traction with computers as well as phones, look out. Tim Cook might be right when he says the company is just starting to "scratch the surface." If you're an Apple investor, that thought should leave you giddy.
A trifecta of PC companies
I'm including Intel (Nasdaq: INTC ) , AMD (NYSE: AMD ) , and NVIDIA (Nasdaq: NVDA ) as a PC basket. The main idea being that while PC demand in the US is shriveling up, key emerging markets are picking up the slack.
Jen-Hsun Huang, CEO of NVIDIA, highlighted the reason for the company's success: "In China, the attach rate is about 80% and in Europe the attach rate of GPUs in consumer PCs is about 60% some-odd, 60% to 70%. Here in the United States the attach rate is only in the 20s and I don't know exactly why."
In the case of China, you have to focus in on ravenous demand for online games. Largely as a result of this, NVIDIA is seeing attach rates of its graphics cards at around three times as high as the United States rate. That should give the company's graphics offerings much better traction than a U.S. investor looking at weakening domestic demand might think.
Meanwhile, Intel's CEO, Paul Otellini, is confident in the growth of new markets:
You can see why we're so optimistic about the emerging markets opportunity. For example, Turkey and Indonesia are up over 70% each. India is up 17%, Russia is up 15%, and China is up 14%. The latest data on Latin America also showed growth of 12%. Brazil remains the key driver of this growth, and is poised to become the third-largest market for computers in 2012.
Looking at Intel and AMD, the logic is pretty simple: for the time being, PCs are a two-horse race. As ARM Holdings (Nasdaq: ARMH ) attacks PCs in the coming years, that dynamic could change. However, ARM's entry into the market is reliant on Microsoft launching Windows 8, so its impact likely won't be felt until at least 2013. In the meantime, Intel and AMD can feast on unexpectedly high demand from emerging markets across the globe.
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