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Why China Won't Love the iPhone

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Why is China the cure-all? Seriously, I'm asking. The way we talk about it, you'd think it was a magical fairyland where American companies go to seek enlightenment and profits. But this is largely a myth -- one that Apple (Nasdaq: AAPL  ) investors are buying hook, line, and sinker.

This week, the Mac maker will begin selling the iPhone to Chinese nationals through a non-exclusive deal with China Unicom (NYSE: CHU  ) . Negotiations with China Mobile (NYSE: CHL  ) are apparently still under way. Investors tremble at the possibilities, as if China Unicom customers will line up for hours before dawn to get a new and government-approved iPhone.

"With the iPhone dominating here, soon to be in China, the iPod, [Touch], new Macs, and [iTunes] this company looks to be on the verge of having a [Microsoft (Nasdaq: MSFT  ) ] type of stock splits every 6 months," DarthMaul09, an All-Star investor in our Motley Fool CAPS database, wrote earlier this month.

Color me skeptical. I own Apple shares, but not because of the China connection. I own shares of Apple because software developers are the new power brokers in telecom, and they're developing for the iPhone more than any other smartphone platform. Software, volume pricing, and global broadband adoption are more likely to drive growth than untapped territories.

They'll certainly drive more growth than China will; its 3G network is new and comparatively slow when compared with what we U.S. iPhone users are used to. Worse, China Unicom's version of the iPhone is a lightweight that lacks Wi-Fi support.

This is a serious issue, but it isn't surprising. China has a history of protecting its own -- (cough) Baidu (Nasdaq: BIDU  ) (cough) -- leaving foreigners to pick up scraps where they may. In this case, officials are ensuring that Wi-Fi hot spots don't substitute for its domestic carrier networks in delivering applications data.

Thus, China Unicom's strategy to win customers isn't to offer more features, or even better pricing, but to offer the 1 million or so who have unlocked iPhones operating on China Mobile's GM network "amnesty" via a contract for its own network, IDG News Service reports.

I doubt this approach will work. What is clear to me -- and to my Foolish colleague, Motley Fool Global Gains co-advisor Tim Hanson -- is that you don't get massive growth by offering locals Diet Coke when they already love Mountain Dew.

"The iPhone isn't coming to China; it's already there. When we visited in July, even our taxicab drivers in Shanghai already had iPhones. So if you're looking for dramatic growth, you're probably not going to get it," Tim said when I spoke with him Monday night.

He's right. The Chinese consumers who can afford an iPhone already love the caffeinated, high-octane version. Why would they switch to the diet version, and why now? The answer, of course, is that they probably won't.

For related Foolishness:

Apple is a Stock Advisor selection, Microsoft is an Inside Value pick, and Baidu is a Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy has nothing more to say at this time. Thanks for dropping by.

Read/Post Comments (6) | Recommend This Article (12)

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 October 27, 2009, at 1:27 PM, megaroid wrote:

    The Chinese have a dual SIM card iPhone knock off that is cheap and very good. Add that to the fact the folks that can afford the iPhone rather get an outside version (with Wi-Fi), and I agree with your comment. There will be a bit of a sales pickup, but no major gains from China for ANOTHER cell phone.

    The iTunes/apps store in the iPhone is the key. This is what the Chinese market wants, and for the folks that can afford it they will get an iPhone to consolidate devices. Getting the apps store to grow sales will be the key even as the phone is handicapped by the China laws and network. I do not think that sales gains from China are going to be a killer, but the apps and store are going to bring many new customers. And it will continue to grow over time...but driven by apps not the phone abilities.

  • Report this Comment On October 27, 2009, at 1:48 PM, DefunctAcct wrote:

    "Sensational" reporting?

    You generalized that "Apple investors" treat China as "cure all"? Investors expecting Chinese to "line up for hours before dawn"? Which investor? You?

    First, what is there to cure? Second, how many investors are you talking about and where are the correlating facts supporting your claim?

    This article has some good points but the attempt at "sensationalism" took up too much space and you spent insufficient effort exploring the more important issues. It is unfortunate.

    Until next time.

  • Report this Comment On October 27, 2009, at 2:06 PM, TMFMileHigh wrote:

    Hello sillvalley,

    Please take a look at the CAPS comments for Apple. Throughout, you will find references to the growth opportunities afforded by China.

    'Cure" is a reference only to the metaphor, which was meant to illustrate that China has become the catch-all answer for those expecting further iPhone growth.

    My apologies that this came across as sensationalism, but I think it's perfectly justified. Enthusiasm for China is rampant, and in the case of the iPhone opportunity, irrational.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On October 27, 2009, at 2:32 PM, FreeRange1 wrote:

    The author of this hurled "article" has no idea what he is talking about. I live in Beijing and have been coming to China for 10 years and can attest to the fact that the iPhone will indeed be a huge success. First, there are over 1M iPhones here already and they paid between $800 - 1000 USD to get them on the black market. Second, Wifi is not that important to the Chinese. Even though the phones that are here have it, they don't really use it that much, if at all. Second, you are underestimating the total size of the middle class market here, which loves their phones - it is now around 250M people, and they have lots of money saved up since they have the highest savings rate in the world. Next, even though the 3G network is new here, it isn't all that old in the US either fool, and it is fast, especially when you put it up against their internet service. Lastly, the phones that will be sold here will be subsidized!!!!!!! Give it a rest! Yes, the iPhone in China isn't going to drive Apple up another 100 pts, but it is going to have a significant impact, as is Apples accelerated growth AROUND THE WORLD.

  • Report this Comment On October 27, 2009, at 6:02 PM, WoodyDog1400 wrote:

    The iphone is China is equal to landing on the Moon. One small leap for the iphone in China, but one GIANT leap for Apple in it's world dominance. We will only see Apple get bigger and stronger.

    It ironic, the same was said about Microsoft in the 90's....

  • Report this Comment On November 02, 2009, at 12:19 PM, TMFMileHigh wrote:

    The early reports are in, and they aren't encouraging:

    A question for those who've commented here: What, in your analysis, will drive long-term demand for China Unicom's edition of the iPhone?

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

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