It isn't exactly a secret these days that tech giant Apple (NASDAQ: AAPL ) intends to lean heavily on the People's Republic of China to serve as one of the key growth engines for Apple and its growth array of iDevices in the years to come, and rightly so.
The Chinese smartphone market is already the world's largest smartphone market, a trend which will only become more pronounced in the years ahead.
However, a recent rumor also highlights one of the key risks Apple faces in doing business in this critical growth market as well. Let's take a look.
China put the squeeze on Apple's iPhone 6?
According to a recent research note from UBS' equity research arm, the Chinese government is actually actively pressuring several of its state-owned carriers to reduce the amount of subsidies they afford Apple's iPhone.
According to UBS' finding, the Chinese State-owned Asset Supervision and Administration Commission (how's that for a name?) requested that Chinese telecom giants China Telecom, China Unicom, and the true behemoth in the Chinese smartphone market China Mobile all reduce their marketing costs by as much as 20%. About one-third of that requested 20% marketing decrease gets allocated directly toward handset subsidies that China's big three carriers allocate to devices like Apple's iPhone and others.
The reduction in subsidy support would broadly affect handset makers, but by UBS' thinking, could have a disproportionately large impact on higher-end devices like Apple's iPhones and for good reason. Apple's iPhones represent about one-third of the market for smartphones that cost more than $500 in China. All told when factoring in added sales and luxury taxes, Apple's iPhone sells for $846 at Apple stores in China . And given the there's definitely a case to be made that Apple's iPhone franchise would feel the sting from China's largest carriers reducing their subsidy support
Hurry up and wait
With Apple widely expected to launch two larger-screened iPhone 6s later this year, the potential to consolidate share in emerging markets like China is absolutely massive, another key reason this emerging storyline is so unnerving for Apple investors.
More broadly, the Chinese government has a long track record of being somewhat protective about nurturing its budding domestic technology industry, especially in areas such as Internet services. However, in the past several years, China has seen a new cadre of domestic smartphone manufacturers rise up as well, probably most notably Xaiomi. Of course, it's hugely unclear whether or not the motivation behind the move is protectionist versus financial in nature.
But at the end of the day, this is just another example of the at times frustrating realities companies like Apple face when doing business in countries where business and government are often so closely linked. Apple investors will have to wait and see exactly how the fallout from this emerging storyline plays out. However it ends up, Apple under new CEO Tim Cook will undoubtedly remain firmly committed to expanding its shipments in China. With China accounting for 15% of Apple's 2013 revenue and counting, China's simply too crucial a market for Apple to pass up.
How easy that might prove though remains up for in the air.
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