1 Simple Reason Why Apple Will Always Make Money in China

Apple  (NASDAQ: AAPL  ) doesn't need an "iPhone Mini" to beat out smartphone competitors. Sure, Google's  (NASDAQ: GOOGL  ) Android commanded the mobile OS market while manufacturers bolstered the Android platform in 2012, but quantitatively focused investors are neglecting one very important facet about the Chinese consumer that could push Apple's stock higher -- whether there's an iPhone Mini or not.

Android is pushing Apple out worldwide
Any way you look at it, smartphone numbers spell trouble for Apple. Last year, Android captured up to 34% of the total phone shipments, while iOS phones accounted for only 11% of an aggregate 438.1 million mobile phones last quarter, according to a Canalys report. Within the smartphone market, Android dominated with 69% or 216.5 million of the shipped smartphones.  

Once you dig deeper into the Android numbers, the picture gets worse: Apple seems to face a full frontal assault from pretty much every single smartphone manufacturer.

While Apple sold a respectable 101 million smartphones last year, that's still 74 million less than No.1 Samsung. More shockingly, the South Korean company grew at a staggering 78% last quarter alone -- handily leaving Apple in the dust. And Samsung is only the start of the story.

In the past month, there's been speculation that No. 3 manufacturer Nokia  (NYSE: NOK  )  -- which shipped 35 million units -- might launch an Android phone. Although the company previously said it would only develop for Windows Phone, the competition and stakes seem too high for the company to not diversify. In all probability, an Android phone is imminent -- and all the more reason why the media thinks Apple's software and hardware market share are about to plummet.

Apple's biggest threat: Cheap Chinese phones
What may really push Apple to release a low-cost iPhone may be competition from China, where Android commands 80% of the smartphone mobile OS market.

Due to Chinese demand, Huawei, ZTE, and Lenovo each grew by triple digits to take the No. 3, No. 4, and No. 5 spots, respectively, for the fourth quarter of 2012. Now, no one would dare say that any of these companies can build iPhone-quality phones, but these companies' portfolio of low-cost Android smartphones have helped them zoom past Sony. That's the first time Sony has ever dropped out of top-five rankings, and seemingly left to die in the smartphone arena!

As these Chinese companies continue to build on and broaden beyond their low-cost phone portfolio, they may soon become another "Apple-killer" like Samsung.

Don't believe me?

Just look at Lenovo. The company can obviously build great products, like its ThinkPad laptops. And Lenovo can do it again. True, they may need to acquire BlackBerry, but, if they do, they could boost their hardware capabilities to take on Apple.

As domestic manufacturers seem to have the Chinese market locked down and looking to expand abroad -- coupled with Samsung's dominance -- it's understandable that Apple investors would hope for a low-cost iPhone. By offering a cheaper, entry-level model, Apple could use the iPhone Mini as a way to lock in customers to its product and app ecosystem then upsell them later.

But after taking a second to think about this seemingly surefire strategy, I question whether it's even necessary to build an iPhone Mini. Thinking about it, I think China is so Apple-crazy that Apple will be fine either way.

Why China will always love Apple
To put it simply, Apple is still Apple in Chinese minds. They covet the company's simplistic, rebellious, and sophisticated brand so much that Apple was China's "Most Popular Brand" in 2012.

According to the Boston Consulting Group, China's affluent class -- with disposable incomes of $20,000-$40,000 -- is 120 million people strong, and expected to grow to 280 million in 2020. One key facet of their shopping habits:

[They] seek status and recognition. They want to exhibit their new socioeconomic position by buying brands that were once unaffordable. They often feel enormous social and peer pressure to "look good".

And from what I know of my friends and family friends, it's true. It's not uncommon to see Chinese consumers choose Apple simply because it's in vogue. That's pretty apparent after talking to my Chinese friends who shelled out $850 (5,288 yuan) to buy the phone outright.

So even if the company doesn't gain the most software or hardware market share, I still believe that Apple will see consumers flock to the iPhone. Now, it may not be their first smartphone, but as the brand-conscious Chinese consumer moves upward through society, I think you can bet that they'll switch to Apple.

In short, I wouldn't worry so much about the mobile phone statistics or follow news about iPhone Minis. Apple is still very relevant and remains the dominant cultural force and style brand of technology in today's China. No matter what happens, Apple is a great place to invest for the long term.

If you're still wondering whether Apple remains a buy, then The Motley Fool has you covered in our brand-new report. Not only does the report further detail the opportunities in China, but we'll let you know what other growth avenues Apple has left and whether competitors like Samsung and Google are reasons to sell your shares now. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (6) | Recommend This Article (5)

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  • Report this Comment On February 14, 2013, at 6:07 PM, eb8888 wrote:

    Kevin,

    Check your guanxi!!!! AAPL has lost its WOW factor in China. I have been doing business with Chinese companies since 1998 and lived and worked in Shanghai for 5 years. I was in Shenzhen prior to the Spring Festival and visited the electronics area twice during my visit. The authorized AAPL resellers were EMPTY; I polled about 4o of them and they were selling less than 2 iPhones or iPads (mini included) per day.

    Literally all of my business contacts have switched from the iPhone to a Galaxy S3 or Galazy Note 2.

    I had meetings with key executives at Huawei (Huawei employees cannot buy the Ascend Mate yet, it is just coming to mass production), ZTE, TCL, Skyworth and other companies in the Shenzhen area and 4 out of 5 of them were using the Galaxy Note 2. The Chinese middle class and business people LOVE the stylus and the ability to use your finger to write Chinese characters. Much faster than typing. Jobs totally missed this (and is strange for someone who studied calligraphy) when he dissed the use of a stylus.

    AAPL market share last quarter was a distant second to Samsung and they are being chased closely Huawei, Lenovo and ZTE (interesting that all are closely associated with Beijing). I believe that AAPL will drop to number 5 or 6 in market share for the current quarter and could be number 8 by the end of the September quarter (exactly where they were last year).

    China is NO LONGER in love with AAPL. It no longer is considered a prestige product with WOW. In fact, the Shanzhai are not even producing knock off versions; today they are copying the Galaxy S3!!!

  • Report this Comment On February 14, 2013, at 6:26 PM, deasystems wrote:

    @eb8888 wrote, "The Chinese middle class and business people LOVE the stylus and the ability to use your finger to write Chinese characters."

    Both are fully supported on iOS devices.

    "... the Shanzhai are not even producing knock off versions; today they are copying the Galaxy S3!!!"

    So, the Chinese love the South Koreans?

  • Report this Comment On February 14, 2013, at 6:40 PM, deasystems wrote:

    @eb8888: Something else to add: Are you trying to tell us that the Chinese prefer a low quality plastic device made in Korea or Vietnam to a high precision metal-cased device assembled in China?

    Yeah, someone needs to check their guanxi alright, but I don't think it's the author of this article...

  • Report this Comment On February 14, 2013, at 6:50 PM, PaulApp wrote:

    Sure, Apple will always make money in China... but by how much compare to other competitors!

  • Report this Comment On February 15, 2013, at 6:35 AM, tonycheung wrote:

    Actually there were copy IPhones available in China and indeed there was an entire shop in Shenzhen that was a rip off of the apple store, down to the layouts, blue colour apple T-shirts, wood panelling etc. Apple actually sued to get the store closed.

    People are flocking to the apple stores rather than resellers. This is definitely the case in Hong Kong where resellers are quiet whilst long queues still exist at ALL of the apple stores in Hong Kong.

  • Report this Comment On February 15, 2013, at 9:47 PM, jandjsfather wrote:

    Wife and I visited China's major cities in November and the several Apple stores we saw were filled with customers. Apple was the most popular of all mall shops too.

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