When Apple (Nasdaq: AAPL) announced a 2009 deal with China Unicom (NYSE: CHU) to distribute the iPhone, I mocked the impact. "5,000 reasons to dislike the ChiPhone," I wrote at the time, a reference to uninspiring opening weekend sales for the device.
Fast-forward two years. Last night, the Mac maker punked Wall Street by reporting blowout fiscal third-quarter results. Every number was so good that none except one stand out. Which one? China sales. The Mac maker booked $3.8 billion in revenue from Mainland China, Hong Kong, and Taiwan during the fiscal third quarter.
"This has been a substantial opportunity for Apple and I firmly believe that we're just scratching the surface right now. I think there is an incredible opportunity for Apple there," Chief Operating Officer Tim Cook said during yesterday's conference call with analysts.
Sticking it to the iPhone skeptics
We don't know exactly what drove sales in China, but demand for the iPhone could be partly or even mostly responsible.
"Higher net sales in the Asia Pacific segment were due mainly to the increase in iPhone revenue primarily attributable to new carrier launches, introduction of iPad, and increased sales of Macs," Apple said in its second-quarter 10-Q filing with the SEC.
Now assume that the pattern held. Are you still surprised the Mac maker sold 20.3 million iPhones during the quarter, far above the 15 million to 17 million analysts had expected? I'm not. U.S. consumers may be holding off for the iPhone 5, but Chinese buyers want whatever iCandy they can get their hands on right now.
How do I know? Apple's store in Beijing was "packed" when Sean Sun, a teammate of mine at Motley Fool Rule Breakers, visited China last month. He was there on a scouting trip with the Motley Fool Global Gains team and came away with a strong sense that more Chinese consumers are buying into big brands -- a sense that Global Gains co-advisor Tim Hanson confirmed when I asked him about it this morning.
"I've heard stories about people who can't afford an iPhone just buying the headphones and walking around with their cheaper phone in their pocket -- giving the illusion they have an iPhone," Tim said. The implication? Envy is more powerful than greed. Black and gray market iPhone access hasn't crimped demand.
While the rumor mill slowly grinds
For Cook and the rest of the team at Apple, it's a well to be tapped. The Wall Street Journal says he visited the offices of China Mobile (NYSE: CHL) last month to talk about the iPhone, resuscitating talk of a distribution deal long since thought to be dead.
Expect Cook to be respectful but firm in negotiations. More than 5.6 million already use iPhones on China Mobile's network, while the high-profile failure of the carrier's so-called "oPhone" -- a China-specific handset based on Google's (Nasdaq: GOOG) Android operating system -- has left the company with little choice but to figure a way to fulfill demand for more Apple goodness.
My guess is that Cook is right. For all the talk of the Verizon (NYSE: VZ) iPhone being a game-changer, the biggest opportunity of all may be selling smartphones in a land with money, a growing consumer culture, and fast data networks. Apple sold 20 million iPhones in the fiscal third quarter. That number may look small five years from now.
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