With all the consternation about the Chinese economy and the potentially disastrous ripple effects a slowdown in the nation could have on global growth, perhaps now
doesn't seem like the most ideal time to double down on China.
However, that's exactly the state of affairs at tech giant Apple (NASDAQ:AAPL).
According to a recent report from Chinese Web portal Sina.com, Apple CEO Tim Cook in an interview said he plans to more than double his company's current store count in China over the next two years.
Bold move? Maybe. However, this is also unquestionably the right move for Apple for a number of reasons.
Apple in China: Betting on the future
Cook's plans would increase the number of branded Apple stores in China from 15 to 40 within 24 months. This is down from Apple's previously stated goal of tripling its Chinese retail presence. However, it's still an important step in Apple's continued emphasis on emerging markets and China in particular.
This new figure comes amid, and fits nicely within, the broader story of Apple's ongoing efforts to revive its retail business. In the interview, Cook noted that Apple had roughly 40,000 points of sale for the iPhone in China but only 15 branded Apple Stores. While establishing such a robust distribution system has made China Apple's third-most lucrative market, the lack of branded retail locations also limits the company's ability to sell its entire product portfolio in the nation.
The key here is how the iPhone relates to the rest of Apple's product portfolio. As by far Apple's most popular product, the iPhone serves as the "gateway product" to other devices in the company's hardware ecosystem. And because this ecosystem tends to be extremely sticky, consumers who buy an iPhone also largely purchase other Apple devices in greater numbers than the average consumer. However, the 40,000 distribution points of sale Cook referenced in the interview typically only peddle the iPhone, leaving Apple largely unable to capitalize on the growing cadre of Chinese consumers in its ecosystem. Without more branded retail locations to showcase its iPads and Macs, Apple is clearly leaving money on the table -- something it hopes to slowly remedy via its store expansion plans.
Rising tide lifts Apple's boat
By laying the groundwork for a larger branded consumer experience, Apple is setting the stage to better maximize the financial impact of Chinese growth on its own bottom line.
According to research firm IDC, the Chinese smartphone market will receive 420 million smartphone shipments in 2014, a number that is expected to grow to more than 550 million by 2018. Market opportunities don't come much larger than this.
However, there's also an element of caution in Apple's plans. Expanding store count from 15 to 40 in a country of 1.35 billion people isn't exactly the most aggressive of tactics, but that's probably for the best. Income inequality remains significant in China, meaning Apple's addressable market there remains far smaller than the overall population. And there is undeniably at least some degree of skepticism or uncertainty that China's economic miracle will remain as robust in the years ahead as it has been to date. Taken in total, the "go slow" approach seems like exactly the right move, particularly since Apple has the aforementioned robust third-party sales network for the iPhone already in place.
Apple aims to revive its retail business in a big way under recently appointed retail chief Angela Ahrendts, and China should, and will, play a pivotal role in this story line. So while its retail presence represents only a drop in the bucket of Apple's overall business in China, recent moves from the tech giant point to that changing in subtle, yet meaningful, ways in the years ahead.
Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple and Sina. The Motley Fool owns shares of Apple and Sina. 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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