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Good News and Bad News for Apple in China

By Tim Brugger – May 15, 2013 at 1:00AM

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Apple killed it in China in Q1, but the road could get bumpier the rest of 2013.

The much-anticipated shift to smartphones from feature phones in 2013 appears to be on track, according to the latest data from Gartner. The expectation that smartphones would, for the first time, outsell other handsets didn't quite happen in Q1, but the trend is clear to see. Last year in Q1, smartphones accounted for just 34.8% of the global mobile phone market. This year, smartphone sales jumped to over 49% of the overall mobile phone market in the first quarter, and Apple (AAPL 2.56%) enjoyed an increase in market share; up to 9% in Q1 of 2013 from 7.8% in the year-ago period.

In spite of difficulties securing deals with Asian wireless companies, much of Apple's market share growth was due to a great first quarter in China -- that's the good news. Unfortunately for Apple shareholders, as we move into Q2 and beyond, the picture isn't quite as rosy.

The numbers
To no one's surprise, Samsung dominated the worldwide mobile phone market in Q1. With over 100 million units sold, and nearly 65 million of those smartphones, Samsung continues to pull away from the pack. Though Gartner's not sold on Samsung's Galaxy S4, calling it "more of an evolution than a truly revolutionary device compared to the S3," they do expect it will continue to drive sales growth in 2013.

As for Apple, the decline in global feature phone sales is a positive since it's steadfastly refused to enter the low-end feature phone market. And with nearly 7 million iPhones sold in the rapidly growing Chinese market in Q1, it would seem Apple's future is looking good. But after further review, the second and third quarters of 2013 could be challenging for Apple.

The hurdles
When does selling 7 million phones in an exploding market become worrisome? For Apple, the answer is when the sales are largely due to ridding itself of lower-cost iPhone 4 inventories, rather than ramping up sales of its iPhone 5. And that, according to Gartner, is exactly what happened in China in Q1. Unfortunately for Apple shareholders, with no new phones on the (immediate) horizon, "the next two quarters will also be challenging," says Anshul Gupta of Gartner.

Now, couple the shedding of iPhone 4 inventory in China with Apple's inability to secure subsidy deals with the likes of China Mobile, the largest wireless carrier in the world, and it's difficult to see how Apple moves its iPhone 5 units in Asia. Asking the Chinese consumer to spend $650 or $700 on an iPhone is wishful thinking, to say the least. Maybe it's time Apple CEO Tim Cook makes another trip east?

As for the mobile phone OS world, Google (GOOGL 3.04%) isn't just holding its own with Android; it's continuing to pull away from the pack. Last year at this time, Google's Android held about 57% of the global smartphone OS market, with Apple a clear second at 22.5%. In this year's Q1, the two behemoths still own the OS market with a combined 92.6% share, but the gap between the two is widening in Google's favor. Google's Android OS now runs on over 74% of all smartphones in the world, while Apple's iOS market share has dropped to 18.2%.

Okay, so now what?
As Google and Samsung continue to grow their respective market shares, Apple is staring down what could be a tough couple of quarters -- not a pleasant notion for shareholders patiently waiting for Apple to break out of its share price funk. So, what's an iFan to do? If you're on board with the long-term potential of Apple at these share price levels, patience has never been more important.

Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, China Mobile, and Google. 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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