Phablets, LTE, and iOS: A Sneak Peak at China's Smartphone Trends


China is the world's largest smartphone market, and if the latest estimates from IDC pan out, then there's a lot for investors to look forward to over the next few years. While not all of the estimates are surprising, they do point to pivotal smartphone trends.

Faster speeds and more options
This year about 360 million smartphone will ship in China, with that number expected to increase to 450 million next year. While the estimated 25% year-over-year shipment increase is substantial, what should be more interesting to investors is who is potentially benefiting from the increase.

iPhone 5c. Source: Apple.

IDC expects the smartphone shipments to increase partly due to Apple's yet-to-be-announced launch of the iPhone 5c and 5s on China Mobile . An analyst for IDC said in the report that though Apple's sales of the iPhone 5 had been "sluggish," the company's market share is "expected to remarkably improve with the launch of the new iPhone."

So what does "remarkably improve" actually mean for Apple in China?

The IDC thinks that the new iPhones -- along with selling the devices on China Mobile -- will double Apple's current mobile operating system market share by 2014.

While Android devices will still dominate the market, forecasts show iOS continuing to gain traction, while Android retreats a bit. That's good news for Apple investors who've been frustrated by Apple's seemingly miscalculated iPhone strategy in China.

But wait, there's more
Mobile operating system shifts aren't the only pending changes in China. It's no secret the country is building out its 4G capabilities, and by next year it's expected to ship 120 million 4G-capable phones, with 32 million of those using China Mobile's TD-LTE network. China Mobile is expected to launch its new 4G network before the end of the year, which means we could see a China Mobile iPhone some time in November.

When that 4G-LTE roll out happens, it will be an enormous upgrade for Chinese smartphone consumers, but it's coming at a cost for China Mobile. In the past, the Chinese government covered some of the company's expansion costs, but China Mobile is paying much of the 4G network costs itself -- and it's hurting profits. China Mobile's capital expenditures will increase 49% this year compared to 2012, and according to Bloomberg, analysts are expecting a drop in full-year net income -- which would be a first since 1999.

Aside from 4G's growth, it seems Chinese smartphone users are following the growing worldwide phablet trend as well. The IDC expects the percentage of smartphone screens sized 5 inches or more to increase from 20% in 2013 to more than 50% by 2017. This matches up with earlier IDC data released this month that said phablets are starting to cut into small tablet growth in the Asia-Pacific region.

The phablet trend obviously has implications for Apple, which has been pretty firm on keeping the iPhone screen much smaller than its competitors. But even Apple is rumored to be testing a larger iPhone, and by the time a possible iPhone 6 rolls out, it could be prime time for larger phones in China. Phablets tend to fall into the high-end market and bring larger margins, which Apple used to enjoy and is fighting to increase.

AAPL Gross Profit Margin Quarterly Chart
AAPL Gross Profit Margin Quarterly Chart

AAPL Gross Profit Margin Quarterly data by YCharts.

Looking ahead
With the coming changes to China's smartphone landscape, it looks as if Apple may be better shape in the country than some assumed. Once China Mobile gets its 4G LTE network up and running and -- hopefully -- officially launches the iPhone, Apple may be able to enjoy some of the IDC predictions. When that happens, keep an eye on how the two companies work together to offer some sort of subsidized iPhone on the network. While subsidies in China aren't as common as in the U.S., they're increasing in the country and China Mobile's competitor, China Unicom, already uses subsidies for the 5c and 5s.

There's still a few things that need to fall into place for Apple in China, first of which is officially launching the iPhone on China Mobile. Investors should wait to see that happen before assuming any of the above predictions will come true for the company. But I think it won't be long before a deal is announced and we start seeing more growth from the iMaker in China. Better late than never.

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Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. 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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