Apple Won’t Go for Broke in China
September 12, 2013 Leave a comment
Updated September 11, 2013, 6:09 p.m. ET
Apple Won’t Go for Broke in China
The Company Is Trying to Maintain Its Industry-Leading Profitability
Apple AAPL -5.44% still isn’t going all out for growth in China, preferring instead to protect its high profit margins. Its new devices simply aren’t priced to sell there—so much for the ballyhooed cheap iPhone targeted at consumers in emerging markets. China matters to Apple because, as developed markets become saturated with smartphones, the country stands out for its size and growth potential. Research firm Canalys estimates that total smartphone sales in China will reach 421 million units next year, and Apple has only 5% of the market.One problem is that Apple still lacks a deal to sell iPhones through China Mobile,0941.HK -0.98% the country’s largest carrier with more than 700 million users, compared with 442 million for the two smaller carriers that Apple works with combined. Apple’s new phones are now compatible with China Mobile’s domestically developed 4G technology, so a deal is likely to be imminent.
But the bigger issue is price. The new, plastic iPhone 5C will cost at least 4,488 yuan in China, or around $730, according to Apple’s China website.
Unlike in the U.S., carriers in China don’t typically offer subsidies to bring down the sticker price of a phone. The basic iPhone 5C costs just $99 in the U.S. with a two-year contract. But even an “unlocked” 5C not tied to any carrier would cost just $549 in the U.S. So Chinese customers are still paying a large premium.
The country’s 17% value-added tax doesn’t help. Neither do import duties on components such as screens and chips, which apply when the phone is sold in China. But the phone still could have been cheaper if Apple had been willing to sacrifice profit margins to reach the country’s less-affluent customers.
What is unclear is whether China Mobile or its two smaller rivals will break with past practice to start offering generous subsidies for the handsets.
If they don’t, Apple’s growth in China is set to disappoint. Morgan Stanley, for instance, assumed the 5C would cost between $400 and $500, and forecast it could help Apple sell more than 30 million additional phones in China in a year. Such estimates will now need to be revisited.
Apple shares fell 2.3% in the U.S. on Tuesday. Perhaps more telling, on Wednesday in Asia, many of its suppliers in the region fared worse. Shares in Pegatron Corp.,4938.TW -3.59% the Taiwan-based assembler of the iPhone 5C, fell 6.9%, while camera-lens supplier Largan Precision Co. 3008.TW -1.38% fell 6.4%.
Rather than go decisively down-market in China, Apple is trying to maintain its industry-leading profitability. It is a defensible strategy, but clearly not one that will satisfy growth-hungry investors.
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