To steal a phrase from the classic movie Forrest Gump, tech giant Apple (NASDAQ:AAPL) and China go together like "peas and carrots." In only a few short years, China has blossomed from a relative financial backwater on Apple's income statement to one of the single most important drivers of its performance, accounting for roughly 16% of Apple's sales in its most recent fiscal year.
This symbiosis should continue to deepen in the coming years. But with differences in disposable income presenting a genuine challenge for Apple in China, the tech giant will need to continue to find inventive ways to make its iDevices, particularly its iPhones, increasingly accessible in this all-important market. And in this vein, Apple recently rolled out a new measure it hopes will do just that. Let's have a look.
Apple doubles down on China
According to a recent report from Bloomberg, Apple plans to begin a version of its highly successful U.S. iPhone trade-in program in China as early as March 31. Per the terms of the reported deal, Apple will partner with its (in)famous assembly partner Foxconn to handle the logistics of buying and reselling these older iPhones.
In terms of specific mechanics of the process, consumers will bring their old iPhones into an Apple store where Foxconn will assess the condition of these older iPhones and assign consumers an in-store credit that can be put toward the purchase of a newer iPhone, according to Bloomberg, which cited people familiar with the effort. Foxconn will then refurbish these older iPhones as needed in its assembly plants and resell them through its own e-commerce websites as well as Alibaba's Taobao marketplace. Apple apparently never takes ownership of the phones, trusting the whole process to be run smoothly by Foxconn.
A win for all parties
Although it might sound strange at first, Apple investors should love this news.
Faced with the threat of rising competition from Samsung, Apple partnered with third-party smartphone reseller Brightstar in the U.S. in 2013 to help hasten the iPhone 5's upgrade cycle. In fact, Apple began accepting both older versions of the iPhone as well as non-Apple smartphones whose trade-in value consumers could then put toward the purchase of an updated iPhone. The move has since proven highly popular, which should come as no surprise given the high up-front expense of Apple's iPhones. By one analyst's estimates, over half the U.S. users that upgraded their iPhones in CY Q4 2012 opted to use these upgrade credits. Apparently, consumers like it.
At the end of 2014, only 40% of China's roughly 1 billion cell phone users owned a smartphone, according to researcher IDC. The scale of the opportunity technology companies like Apple and many others enjoy in China is almost mind-boggling. That's part of why Apple CEO Tim Cook has said he wants to double the number of Apple stores in China by the middle of next year. However, Apple also must grapple with serious challenges in order to continually expand its business in China.
Using dated but still hopefully illustrative 2013 World Bank stats, per-capita income levels in China sat a whopping 73% below U.S. personal incomes. This has almost assuredly changed since two years ago, and it's also worth noting that China's massive population base means it certainly has a large and relatively wealthy body of consumers in an absolute sense. However, the point remains that it will only behoove Apple to introduce measure that makes its iPhones more affordable in order for it to continue to grow its sales in this increasingly critical market, and that's exactly why Apple investor should love this move.
Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. 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.