At This Rate, Can Apple Ever Catch Google in China?

Apple (Nasdaq: AAPL  ) may have plenty of opportunity in China, but for now Google (Nasdaq: GOOG  ) still reigns supreme.

According to figures from Beijing-based Analysys International, Android significantly grew its market share throughout last year, starting with a 33.6% slice and closing out the fourth quarter with a 68.4% smartphone share within the country. Meanwhile, iOS has wavered and ended with just a 5.7% market share.

Source: Analysys International.

Source: Analysys International.

Low-cost offerings from a slew of hardware OEMs have helped Android gain traction, including handsets from Asian manufacturers such as Samsung (which enjoys nearly a quarter of the market, according to separate estimates from Gartner), HTC, and Huawei, among others.

While Apple offers a higher-quality device, it comes with a heftier price tag that hinders Cupertino's ability to address the medium- and low-end markets. The 1,000 yuan price point is considered particularly important, while the newest iPhone 4S starts at 4,988 yuan. Even the older iPhone 4 and 3GS models come in at 3,988 and 2,888 yuan, respectively.

The 1,000 yuan segment is specifically the market that NVIDIA (Nasdaq: NVDA  ) is targeting with its previous-generation dual-core Tegra 2 found in Android devices. NVIDIA CEO Jen-Hsun Huang mentioned it on the last conference call as one of his company's main growth opportunities in the near term.

Microsoft (Nasdaq: MSFT  ) saw its share shrink to 1.2%, but Mr. Softy still has high hopes of toppling both iOS and Android within China as the company works to "drive the price down." With these digits, that's an order that's getting taller to fill every quarter.

It's not as bad as Research In Motion's (Nasdaq: RIMM  ) 0.1%. Besides, RIM has enough problems to worry about right now. While 60% of its revenue last year came from segments other than Canada, the U.S., and the U.K., such as emerging markets, obviously that's not from China.

One aspect that may be holding back Apple with the iPhone 4S is that it shares the same physical form factor as its predecessor. The iPhone is the ultimate status symbol in China, but Chinese consumers exhibit what's been called "superficial consumption," which also affects purchasing patterns for other luxury brands.

This behavior is locally referred to as "mianzi" (loosely translated as "face") and ties into one's reputation, honor, and respect, which underscores the relevance of the iPhone as a status symbol since it adds to one's mianzi.

Since the iPhone 4S looks identical to the iPhone 4, there's less social incentive to make the expensive upgrade since no one can tell the difference. Apple is widely expected to introduce a redesigned iPhone this year, which would undoubtedly boost sales accordingly.

Apple is seldom the top dog when it comes to market share, but it's usually the king of the profit share.

Apple is definitely an American company set to dominate the world, starting with China. If you need more, here are another three on the house. Emerging markets are a key component to any portfolio, so don't miss this special free report.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of NVIDIA, Microsoft, Google, and Apple, writing puts on NVIDIA, and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

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 April 10, 2012, at 11:18 PM, funspirit wrote:

    interesting, I didn't know about the "face" thing, and the lack of incentive to upgrade since it looks the same.

    Love the human psychology behind it!

  • Report this Comment On April 11, 2012, at 1:12 AM, bbrriilliiaanntt wrote:

    Android has a huge market share advantage by being on China Mobile. This will disappear when iPhone 5 is available on CHL. Watch the trend lines reverse themselves.

  • Report this Comment On April 11, 2012, at 3:00 AM, Fruitfan wrote:

    Why does everyone focus on market share. I know it's important but only to a point with iOS. Apple will likely never hold the top spot but it doesn't need to due the margins. If they can take 20% of the china market by the end of 2013 that would equal huge profits. Google needs to sell 375 androids to every 1 iPhone to match Apples profits. As Apple crazy as the middle class and higher is in china Apple could easily hit 30% by 2014. Which would translate into about an extra 19.43 EPS this is how the stock breaks 1000 per share

  • Report this Comment On April 11, 2012, at 4:16 AM, H3D wrote:

    Will BMW ever catch Kia?

    Probably not.

    Who cares? Certainly not BMW.

  • Report this Comment On April 11, 2012, at 10:55 AM, SkippyJohnJones wrote:

    This article failed to mention distribution as a factor, instead focusing only on price. In the US, we have seen what a huge factor carrier support can be - iOS is nearly at parity with Android now that the iPhone is carried on 3 of the 4 major carriers. Older models at reduced pricing have also lifted iPhone to compete with less expensive Android devices. In China, Apple has bee tied to exactly one carrier until very recently.

    The numbers in this analysis probably reflect a low point for Apple market share in China. At the end of Q411, the 4S was not yet for sale in the country. We saw a similar dip in the US one quarter earlier when the release of a new device was imminent. Also since the ending point in this analysis, Apple has inked China Telecom as a second carrier. Up until this March, China Unicom had the exclusive. The China Telecom deal adds 130 million new subscribers as potential customers, making this deal roughly equivalent to adding both Verizon and Sprint at the same time. Apple has yet to come to an agreement with China Mobile, but it's only a matter of time. The company's 600 million subscribers make it by far the largest carrier in the world, MORE THAN TWICE THE SIZE OF ENTIRE US MARKET. It is widely expected that Apple will do this deal in the next 12 months, catalyzing sales in the country in a major way.

    Another unrelated factor that will give a major lift to Apple in China is the advent of smartphone subsidies. Historically, China has been the purview of Nokia and Samsung feature phones - more recently ZTE and Huawei have snatched much of this low-end share. This morning Nokia released a profit warning, saying that they are effectively being squeezed from both sides - Apple at the high end and inexpensive Android devices at the low end. The ZTEs of the world are able to make smartphones that are price competitive with Nokia feature phones, while carrier subsidies are goosing sales of high end devices like the iPhone. This portends good things for Apple, as the price paid is much less than the 4,888 yuan sticker number. In the US, consumers can get their hands on iPhone for $0 subsidized, but it's the 2.5 year old 3GS model. In China, customers can get a brand new 32GB 4S model for the same $0 price in exchange for a 3 year commitment. The contract requires a $45 plan, which is expensive for China but nowhere near the ARPU that US carriers demand to sell the iPhone. This deal is a reflection of the fact that Unicom no longer holds the exclusive distribution rights in China and will have to compete for users in the future.

    In summary, Apple will likely have significant market share growth in China in the next quarter studied due to the new iPhone. It should be higher again in Q2 because of the China Telecom deal. It should be higher yet throughout the year because of aggressive carrier subsidies. And finally, it will see a major bump when China Mobile gets iPhone. Apple will never "catch" Google in market share, but Apple won't care as long as everyone who can afford an iPhone wants an iPhone. Chinese sales can easily grow at better than 100% for the next few years off a pretty big base, and Apple will scoop up 70% or more of the profits.

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