China Mobile Will Be Huge for Apple

China Mobile Will Be Huge for Apple

Apple's greatly anticipated deal with China Mobile has finally gone into full gear. China Mobile's ever-growing subscriber base of almost 763 million can potentially translate into tens of billions of dollars in incremental revenue for Apple over a number of years. As Apple looks to offset declining revenue growth in most developed markets, the China Mobile deal is crucial for growing the company's fortunes in the near-to-medium term.

China is crucial
Greater China, Apple's second biggest market, grew 13% year-over-year to $25.4 billion in fiscal 2013, which represents 15% of Apple's total global revenue. Rising income levels in the world's most populated country should translate into higher revenue for Apple. In 2012, China's GDP growth stood at 7.8%, which is 3.5 times the GDP growth rate of the U.S., according to data from the World Bank.

The recently finalized China Mobile deal will have a major impact on Apple's top line revenue and earnings for the next few years. As a result, Apple total annual revenue from the greater China region can rise above the current level of 15%.

China Mobile is the world's largest cell phone carrier, and the telecom company has immense influence and a gigantic roster of customers who want Apple products. In addition, Apple's handsets will be available in China Mobile's network of retail stores.

China Mobile is offering monthly plans to its customers like AT&T, Verizon, and other leading carriers will boost iPhone sales substantially from the Chinese market. China Mobile is adding 4 million-5 million customers each month on top of a mammoth customer base of more than 763 million, and this tally will mushroom to a much higher level.

Navigating a competitive market
Apple's lead rival, Samsung, has been turning up the heat. At the end of the last quarter, the global market share of iOS stood at 12.9%, a decline from the year-ago market share of 14.4%. But, devices running the Android OS have a market share of 81%, according to IDC. In addition to Samsung, Lenovo and a number of other manufacturers in China have a strong foothold in the Asian region.

Apple will face intensifying competition from Samsung and other low-cost OEMs who spend a lot of money on innovation and marketing. However, after the launch of the iPhone 5s, Apple's smartphone market share in China surged to 12% in October, up from only 3% in September, according to Counterpoint Research. Apple now ranks behind Samsung and Lenovo in the Chinese handset space.

As China Mobile invests heavily in building out its 4G network, Apple's market share can surge to higher levels in China. China Mobile's huge customer base will give Apple access to much easier distribution for its high-margin iPhones, and also pave the way for incremental sales of other Apple products.

China Mobile already has 45 million iPhone users, but those are unofficial users with unlocked devices. Now that Apple clinched the deal with China Mobile, a large number of those users will likely upgrade to the iPhone 5s and subscribe to data plans thanks to the subsidies provided by the telecom providers.

Top-line and EPS increase
Estimates of the number of potential new unit sales in China have varied wildly among analysts. Incremental iPhone sales from the China Mobile deal have been pegged at 10 million-24 million units, according to estimates from a number of sell-side analysts.

Apple sold 150.3 million iPhones worldwide in fiscal 2013, and China Mobile has 176 million 3G customers. If Apple can manage to rope in 8%-10% of China Mobile's 3G customers, the deal can translate into 14 million-18 million incremental unit sales from China Mobile customers.

However, getting all these customers won't be easy in China. Smartphone buyers in China spend much less money paying for smartphones, compared to the average customer in the U.S. According to market research firm Canalys, in the third quarter, more than 88% of smartphone buyers in China spent less than $500, whereas the price of Apple products have much higher price tags.

Competing companies like Samsung spend heavily on advertising and promotions to maintain market share and drive brand awareness, especially in a large market like China. As a result, Apple might have to engage in more aggressive marketing and promotional activity in the region. Apple is growing its retail presence in China and building more stores, which should aid in that endeavor.

Apple has maintained its pricing strategy for the new line of iPhones, and as a result, its margin should be near current levels. As the margins for the iPhone franchise are higher relative to other Apple products, the impact on the company's earnings per share would be much higher. A number of analysts have upgraded EPS estimates for Apple's fiscal 2014 year, and now the consensus EPS estimates for the year stands a $43.58.

Going forward
The impact of the China Mobile deal could be very significant. More consumer awareness of Apple in the country from the China Mobile deal will translate into strong sales for other Apple products, including the iPad and Mac. As Apple's fan base increases, loyal users will translate into years of solid revenue. The company will benefit immensely in the long-run from this China Mobile deal.

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Ishfaque Faruk 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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