2 Things Hurting Apple's China Plans

Subsidy cutbacks and security warnings could push back Apple's recent advances in the country.

Jul 13, 2014 at 1:00PM

Apple (NASDAQ:AAPL) has long considered China an integral part of its overall mobile ambitions, and over the past year the company's plans have only intensified. Apple recently added China Mobile (NYSE:CHL), the world's largest carrier, as an official iPhone seller and has plans to open at least 20 new stores in the country before the end of 2016.

But this week the Chinese government delivered two blows to Apple's China plans, leaving some investors wondering how Apple will fare over the next few quarters in the country.

Apple China Iphone

Subsidies and security
UBS
' Steve Milunovich said in an investor note this week that Chinese regulators are telling China Mobile and the nation's other carriers to cut back on smartphone subsidies. Milunovich thinks that 50% to 60% of phones in the Chinese market are subsidized and that decreasing the subsidy amount will hurt high-end devices like the iPhone.

As The New York Times notes, the iPhone is more expensive in China than in other countries because the devices "are subject to a 17 percent value-added tax, while those that are exported can be sent abroad tax-free."

The iPhone in China helped contribute to Apple's record iPhone sales in the March quarter -- Milunovich believes Apple sold about 12 million iPhones in China during the quarter .

But it's still unclear just how much this will, or won't, affect sales. In September of last year, China Telecom reduced subsidies for iPhones, yet Apple's sales in the greater China region have increased 13% over the past year.

Apple Store Nanjing

If subsidy concerns weren't enough, this week China' state run TV station, China Central Television, called Apple's iPhone a "national security concern."

Over the past year reports of spying by the US government have hurt American tech companies operating overseas. To make matters worse, the US government is claiming Chinese hackers recently stole data about federal employees.

While the statement from China Central Television may seem like political posturing by the Chinese government, Apple has in the past changed practices and apologized for actions in China -- as Cook did for warranty practices in country.

Foolish takeaway
When it comes to iPhone sales, I'm less concerned about Apple's political issues in China than I am the possibility of subsidy reductions. China and the US don't exactly have the best tech-related relationship and the NSA spying leaks obviously hasn't helped that. But reducing subsidies could have a very tangible effect on Apple's sales.

Right now the company takes about 6% of China's smartphone market, and Apple gets a little less than 25% of its global revenue from the greater China region.

Just like Samsung, Apple is facing increasing competition in China's smartphone space, where Chinese vendor prices severely undercut the iPhone's price point. While Apple is always aiming for the high-end market, any increase in prices would make the cost chasm that much bigger. As China's vendors like Xiaomi are quickly filling up the market, Apple could see slower growth if it loses more ground on iPhone pricing.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple and China Mobile. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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