Pay Attention to This Chinese Power Play

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In the hubbub over demand for Apple's (Nasdaq: AAPL  ) new iPhone 4s, investors seem to have forgotten some important news out of Redmond and Helsinki last week. Microsoft (Nasdaq: MSFT  ) and Nokia (NYSE: NOK  ) are teaming to bring new smartphones to China next year.

Attacking the robot, eating the apple
Right now, all we have is a sketch of what's planned. And that's only because Andy Lees, president of the Windows Phone division, was in Asia speaking at a conference sponsored by The Wall Street Journal. Lees told an attending Journal reporter that Microsoft was going into China "in a big way," with Nokia as a top partner.

Apple and Google (Nasdaq: GOOG  ) investors need to see this as more than an idle threat, and not just because Windows Phone is a good alternative OS (which it is). Microsoft isn't just partnering with Nokia in making Windows smartphones for China. Lees also said Mr. Softy is developing relationships with HTC and Samsung.

We don't yet know how these efforts will pan out, but consider this news through the lens of handset market share. Chinese researcher ZDC found that HTC, Nokia, and Samsung combined accounted for close to 70% of the attention of Chinese smartphone shoppers. A similar survey found that 12% were focused on Windows Mobile. Clearly, there's an installed base for Microsoft to sell to.

A big pie getting bigger
Handset brands are likely to lead the way in generating sales -- Chinese consumers seem more attuned to manufacturers that OS suppliers -- but there are also economic forces to consider. Rising regional demand for PCs and related equipment seems to be fueling enthusiasm for smartphones.

IDC predicts that China will become the world's largest smartphone market by 2015. Globally, some 982 million handsets could reach market that year. Can you imagine? Not only is that more than double the number of advanced devices due to ship this year, but it's also more than six times the number of iPhones Apple has sold since the device debuted in 2007.

The end of feature phones
Couple rising demand with the experience Nokia, HTC, and Samsung have manufacturing on a mass scale. While premium brands do command premium prices -- even in China -- Asia remains a hotbed for feature phones manufactured by Mr. Softy's partners. Drop costs enough, effectively ending the need if not the desire to price smartphones at a premium, and you have the makings of a cost advantage that could become a blunt instrument in the fight for market share.

This isn't just wishful thinking, either. Lees told the Journal that smartphone production costs were falling to the point where, by 2015, it should be possible to build one for $100. Think about that. In a market where there's no such thing as a feature phone, an iPhone could quite quickly become unremarkable without some serious software breakthroughs.

Foolish final words
Don't get me wrong; I'm not suggesting that Apple can't or won't innovate. What I'm suggesting is that, when everything's a smartphone, there's going to be a legion of former feature-phone upgraders looking to China Mobile (NYSE: CHL  ) and China Unicom (NYSE: CHU  ) for a lower-cost alternative that does most of what an iPhone or Android device does. Microsoft can fill that gap, and it can do it in what's soon to be the world's largest mobile market. Don't count Mr. Softy out yet.

And don't think Apple, Google, and Microsoft are your only bets for top-notch tech stocks, either. The Motley Fool recently released a free report about a technology that's changing the way businesses look at markets and competitors. In it you'll get details on the companies poised take advantage of this massive opportunity. Intrigued? Get your copy now -- it's 100% free.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apple and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Apple, Microsoft, Google, and China Mobile. Motley Fool newsletter services have recommended buying shares of Apple, Google, Microsoft, and China Mobile, as well as creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2011, at 8:14 PM, H3D wrote:

    It is impossible to underestimate the importance of the Windoze phone in China. This could be the biggest move by The Redmond Wobbly Jelly since The Kin.

    It's to be hoped that Nokia don't announce their transition to Android 'till after the launch.

  • Report this Comment On October 28, 2011, at 9:08 PM, FreeRange1 wrote:

    LOL - " and not just because Windows Phone is a good alternative OS (which it is)".

    WP7 has been a huge failure. The marketplace has already figured out that MSFT is irrelevant in the mobile space and are more than happy to turn their backs on them. Further, the iPhone and Android are as much about fashion in China, and MSFT is about as far from that image.

    Lastly, when one looks at recent purchase intent data in China MSFT barely shows up on the radar. And how much does Windows cost in China? About $2 US on the street. People don't pay for MSFT products here, except what they are truly worth. About two bucks.

    The final conclusion of this piece is also way off base. The iPhone 3GS, still an amazing phone, is already free with a 2 year contract and will soon roll into China as well. Low cost of entry advantage - Apple.

  • Report this Comment On October 29, 2011, at 9:02 AM, brightkid wrote:

    Don;t underestimate the power of snobbery and ego in China. Apple is primo, and Android second.

    note to previous commentator - FreeRange1--- I completely disagree that Windows is only worth $2, even if that is the going price for PIRATED SOFTWARE.

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