Apple's China Syndrome: iPhone vs. the World

Let’s face it, Apple’s (NASDAQ: AAPL  ) iPhone, though a wonderful device, is seen globally as a high-end smartphone, one that many relish as not only a do-almost-everything handset, but also as a status symbol.

But, as much less expensive Android-driven phones become available in those parts of the world where price is definitely important, and status means less than putting food on the table, paying retail for an iPhone is out of the question.

Greater China (the mainland, Hong Kong, and Taiwan) is Apple’s second largest market outside the United States, with $6.83 million from sales during its last fiscal quarter. But the iPhone fell two notches -- to sixth place -- in smartphone sales during the third quarter of 2012, according to research firm IDC. Samsung and Lenovo, were No. 1 and No. 2, respectively, ZTE was No. 4, and Huawei was No. 5.

The threat to iPhone growth in China, however, comes from companies one may never have heard of in the U.S. Coolpad, for example, is the smartphone maker that jumped up three spots to become the third best-selling smartphone brand in China during that time frame. 

But the real danger for Apple in China and other emerging markets comes from companies like MediaTek, the Taiwanese company behind those companies that have been taking China’s smartphone market share away from Apple. MediaTek is the company that has helped those other companies produce smartphones at prices Chinese consumers just can’t refuse.

MediaTek makes what’s called a “turnkey solution” to the problem of manufacturing inexpensive smartphones. It puts together the chipsets, the Android operating system, packages all that with instructions on how to build the phone, and provides technical support for those companies needing it. Why pay for the research and development of a smartphone when someone has already done it?

MediaTek’s turnkey systems have become so popular that, within 18 months of putting its first chipset in a Lenovo phone in 2011, its chipsets have taken 50% of China’s smartphone market, analysts told the New York Times.

Spreadtrum Communications (NASDAQ: SPRD  ) is a Chinese company that is also in the turnkey smartphone chipset business.  It expects to ship between 80 million and 100 million of its smartphone chipsets in 2013, platforms that will end up in markets where consumers are just now moving up from feature phones to smartphones.

“To date,” says IDC, “much of the world’s smartphone shipments were a direct result of demand in mature economies such as the U.S." 

But that is definitely changing. The growing middle classes in China, Brazil, and India are ready to buy smartphones. China, especially, says IDC, “which supplanted the U.S. last year as the global leader in smartphone shipments, is at the forefront of this shift." 

Even the young tech-conscious consumers of the world have to live within their economic realities. Zhang Ying is a 31-year-old Shanghai resident who wants the latest tech gadgets, but can’t pay a premium for it. He bought a pirated version of an HTC phone last year. “Every person has a price point,” he said. “At a time when some of my friends were buying Samsung or iPhone, I wanted to show that I can keep up with them. A lot of domestic phones are cheap and of fairly good quality." 

“The markets we target have 5.8 billion people, whereas the U.S. and Europe have less than one billion,” MediaTek CFO David Ku told the New York Times. “I need to aim at a global market, not just developed countries.”

By the way, MetroPCS (NYSE: TMUS  ) began offering a Coolpad 4G LTE phone last summer at a no-annual-contract price of $149. True, it runs an older version of Android (2.3), and it doesn’t have the highest megapixel camera (3.2), but compare that to paying $649 retail for an iPhone 5.

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Read/Post Comments (4) | Recommend This Article (2)

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 March 21, 2013, at 9:57 PM, Jjkiam wrote:

    Yes use a dated statistic from the 3rd q 2012 before the Iphone 5's release to reinforce your position. Why not go back further before IPhones were even available in China to prove this point. The only problem with this is reality

  • Report this Comment On March 21, 2013, at 9:59 PM, TruthBToldByMe wrote:

    anytime you speak of Apple in China it's BILLIONS not millions. don't you proof your own copy? Any media article that sights IDC as proof of anything, which apparently can't differentiate between sales and shipments, is nothing more than slack hit ho! MF is such a loser.

  • Report this Comment On March 21, 2013, at 11:46 PM, Melci wrote:

    Dan, you couldn't be more incorrect in your analysis (or more dishonest using stats from the dip in demand in Q3 2012 prior to the launch of the iPhone 5).

    More recent stats from Q4 2012 from Strategy Analytics indicate that Apple surged to a 12% share of the smartphone market in China despite not being available on or compatible with China Mobile, the World's largest carrier with almost three quarters of a *billion* subscribers.

    In comparison, Samsung which does make compatible phones only managed 5% more marketshare than Apple in the whole of China. This means the iPhone has an *enormous* share of the two carriers that the iPhone is available from. The certainty of massive share gains when the iPhone launches on China Mobile is obvious, just as the iPhone surged to a majority share of Verizon's smartphone sales once that carrier launched the iPhone in the USA.

    Analysys International reported the iPad had 73% marketshare in China in Q3 2012 even before the launch of the iPad mini which demonstrates that the growing Chinese middle class is absolutely ready and willing to buy Apple's products whether or not there are hundreds of cheaper alternatives.

    Is anyone else getting tired of the apparent worldwide campaign to try and tarnish Apple's image? I sure am.

    There a now half a billion active iOS devices worldwide with over 300 million of them running the latest iOS 6 according to Apple versus only 750 million Android devices according to Google, most of which are cheap featurephone replacements that get thrown away at the end of contract.

    Apple is still pulling in 70% of the profit for the entire cellphone industry and iOS developers are still making 430% more revenue than Android devs and iOS has surged to 78% marketshare in the mobile business market from 67% last year while Android has plunged from 30% down to 22% etc etc.

    Looks like Apple v. The rest of the world is tending heavily in Apple's favour eh?

  • Report this Comment On March 22, 2013, at 9:10 AM, XMFDRadovsky wrote:

    Yes, "billions", not "millions". Sorry about the typo.

    Not sorry, though, about pointing out the trend in the developing markets where, as the cheaper smartphones' capabilities get closer and closer to the top end phones like the iPhone and the very capable Samsung Galaxy phones -- yet the prices get further and further apart.

    And, as the example of the Coolpad phone being sold by MetroPCS shows, it may not be too long before those "turnkey solution" phones bring that trend to the U.S.

    Thanks for reading,

    Dan

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