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Apple Inc. Is Still Betting Big on the China Market

By Ashraf Eassa - Jan 31, 2016 at 8:30AM

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Despite what Tim Cook describes as "near-term volatility," the iDevice maker is still bullish on its ability to grow its business in China.

Apple (AAPL 2.14%) CEO Tim Cook is on record claiming that China will eventually become the company's largest market. One of the central tenets of Cook's thesis is that the middle-class population within China, numbering just 50 million people in 2010, will swell to about half a billion by 2020, meaning that a lot more people should be able to afford the company's premium devices.

During the company's most recent quarter, Apple reported seeing year-over-year growth in China of just 14% -- a significant slowdown from the 99% growth rate seen in the prior quarter.

Even though 14% growth isn't anything for Apple to be ashamed of, Cook did say that Apple is seeing some tough macroeconomic headwinds in the region. In particular, Cook said the company began to see "some signs of economic softness in Greater China" earlier in the month, with weakness in Hong Kong being particularly notable.

That said, despite what Cook describes as "near-term volatility," he says Apple "remain[s] very confident about the long-term potential of the China market" and that the company is "maintaining [its] investment plans."

Let's take a closer look at how Apple plans to continue to go after this market.

Continued retail build-out
During the call, Cook said Apple is continuing to invest in building out its retail-store presence in the country.

"Angela [Ahrendts, senior VP of retail and online stores] and her team have been on this very aggressive rollout plan," Cook said. "We now have 28 stores in Greater China, and we're on target to have 40 in the summertime of this year."

Although it remains to be seen what kind of impact growing the store count in China will have in the near term, over the long term it's obviously a good thing for there to be more places for Chinese citizens to be able to explore and, ultimately, purchase Apple products.

Tailoring products for the China market
One of the things that's widely believed to have helped Apple in China significantly in the past fiscal year is the launch of the iPhone 6 and 6 Plus. It had been well known for a while that Chinese buyers tend to prefer larger smartphones, and with the 6 and 6 Plus, Apple could finally serve these customers.

It's no surprise, given Apple's immense bullishness on the China market, that Apple will continue to craft its products with an eye toward the wants and preferences of Chinese buyers.

"Obviously, we've got product things in mind and are crafting our products and services with China heavily in mind," Cook stated. "We remain very bullish on China and don't subscribe to the doom-and-gloom kind of predictions, frankly."

Betting on an LTE-driven upgrade cycle
Aside from the company-specific actions that Apple management expects to take to bolster its positioning in China, Cook also appears bullish on a broader transition from 3G to LTE-based devices. Indeed, he said LTE penetration in China as of the end of October was in the "mid-20s" in terms of percentage.

"There's an enormous upgrade cycle there for people that are still running on 3G handsets," Cook said.

That said, although Apple should be able to capture a good chunk of those upgrades, even low-end handsets are transitioning to LTE-capable chipsets. The opportunity for Apple is sizable but probably not as large as the overall LTE penetration numbers would suggest, as more affluent and higher-end buyers have probably already migrated to LTE-capable premium devices.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.

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