Apple (NASDAQ:AAPL) claimed a record 25.4% of smartphone sales in urban areas of China in the fourth quarter of 2014, according to a new report from Kantar Worldpanel ComTech. That's a 4.5 percentage point increase from the prior year quarter, and puts it a mere 2.2 percentage points behind Xiaomi, the top smartphone maker in the country. Another report from Canalys claims that former market leader Samsung has now slipped to third place.
Kantar noted that the iPhone 6 was the best-selling smartphone in urban China during the quarter with a 9.5% market share. Xiaomi's Redmi Note, a phablet version of its entry level handset, came in second with an 8.9% share.
Those figures aren't surprising, since Apple reported that revenue from Greater China soared 70% year-over-year to $16.1 billion and accounted for 22% of the company's top line last quarter. However, we should take a closer look at why China matters to Apple, and what its victory in the Middle Kingdom means for its future in other key markets like India.
Why China matters
According to most analysts, China's smartphone market is saturated and growth is slowing down. IDC claims that over 80% of China's 885 million mobile phone users are now using smartphones. IDC also expects the Chinese smartphone market to grow just 10% this year, compared to 20% growth in 2014. Meanwhile, government-backed wireless carriers like China Mobile are slashing subsidies that made high-end smartphones more affordable.
However, many analysts overlook a few important facts. First, the majority of smartphones in China are low-end to mid-range devices which cost less than $300 unlocked. Second, the rising middle class helped China overtake the U.S. in terms of raw purchasing power last year, according to the IMF. That newly affluent middle class has fueled demand for luxury brands. As a result, China could account for 20% of all global luxury consumption in 2015, according to McKinsey & Co.
Therefore, if we consider the iPhone to be a luxury status symbol instead of a smartphone, its prospects look much better. According to a recent consumer survey published by the Hurun Research Institute in Shanghai, Apple was the year's top brand for gifting among China's richest men and women, beating top luxury brands like Louis Vuitton, Gucci, Chanel, Dior, and Hermes. Apple was the only electronics company on the list, which bodes well for the establishment of a new luxury smartwatch market with Apple Watch.
What a Chinese victory means for India
Apple's progress in China indicates that it could also do well in India, the world's third largest smartphone market after China and the U.S. Only around 20% of India's 770 million mobile phone users currently own smartphones, and most of those devices are low-end ones which cost less than $200.
Samsung and Indian handset maker Micromax are the two biggest smartphone makers in India, while Apple doesn't even rank among the top five, according to IDC. Apple sold just 500,000 iPhones (including older models) in India last quarter, which represents less than 1% of the 74.5 million iPhones it sold worldwide. Yet that figure is also double the amount it sold in the prior year quarter.
As Indian wages rise and fuel the growth of a new middle class, demand for luxury goods will rise, just like in China. Average Indian incomes are currently rising 11% annually, according to research firm Mercer. That steady growth will help India's middle class grow from 50 million people in 2010 to 200 million by 2020, according to research firm EY. Euromonitor International believes that growth will help India's luxury market grow 86% in constant value terms between 2013 and 2018, compared to 74% growth in the Chinese market.
Therefore, if luxury tastes in India evolve in the same way as they did in China, Apple will be similarly elevated above the smartphone market as a luxury brand. This will give it a major advantage over the Samsung, Android One, and Windows Phone devices which are racing to the bottom of the market.
The key takeaways
Looking ahead, Apple's ability to preserve its luxury brand appeal will let the company sell cheaper hardware at higher margins than its high-end smartphone rivals. As long as Apple makes sure that it's mentioned in the same breath as LV and Hermes instead of Samsung and Xiaomi, it will be well shielded from a slowdown in the Chinese smartphone market. That reputation also ensures Apple's success in India, once its middle class quadruples in size by the end of the decade.
Leo Sun owns shares of Apple and China Mobile. The Motley Fool recommends Apple and China Mobile. The Motley Fool owns shares of Apple. 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.