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Cook's China Excursion Could Swell Apple's Coffers

Cook's China Excursion Could Swell Apple's Coffers

Tim Cook likely had many reasons to travel to China this week. Chief among them is to build a market for Apple's products in the world's most populous country. "The purpose of the trip was to sell more stuff in China," Yankee Group Research Director Carl Howe said, "and I think he'll be very successful at that."

By John P. Mello Jr. MacNewsWorld ECT News Network
01/11/13 5:00 AM PT

Apple CEO Tim Cook has had a busy week in China trying to drum up more business for his company.

Cook met with China's minister of industry and information on Tuesday, executives at partner China Unicom on Wednesday, and with Xi Guohua, the CEO of China Mobile -- which has more subscribers than any other carrier in the world -- on Thursday.

Apple suffered a setback in China during the third quarter of 2012 when its ranking in the country's smartphone market, which is now larger than the U.S. market for the devices, slid to sixth place.

That's likely to change in the fourth quarter, when Apple started selling its iPhone 5 in China. In the first three days on retail shelves, 2 million iPhone 5s were sold in the country, according to Apple. Demand for the handsets has been so intense, Apple has started selling them by appointment only in order to avoid long lines and altercations.

Apple did not respond to our request to comment for this story.

Butting Heads With China Mobile

It's apparent Cook's trip to China is aimed at stimulating sales. At one point during the trip, Cook said he believed China would become Apple's largest market.

"The purpose of the trip was to sell more stuff in China," Yankee Group Research Director Carl Howe told MacNewsWorld, "and I think he'll be very successful at that."

How successful Apple is in China may depend on its ability to cut a deal with China Mobile, the country's largest carrier, but the companies appear to be at loggerheads over pricing and technology.

"There has been a lot of resistance by China Mobile to Apple's demands for high prices," Howe explained, "and Apple has been reluctant to put special radios in its iPhones for China Mobile's network."

China Mobile uses a proprietary transmission technology, TD-SCDMA, for its network.

Cheaper iPhone

Historically, Apple doesn't make modifications to its iPhone to accommodate regional carriers, but in this case, it's not beyond the realm of possibility.

"If you offer Tim Cook enough volume, he'll build a lot of things for you," Howe observed.

Another issue Cook's trip to China is bringing into focus is iPhone pricing and how it's costing the company market share in emerging markets. That has given rise to speculation that Apple will launch a lower-priced iPhone for those markets.

Apple's pricing policies will shut it out of 65 percent of the smartphone market in 2013, Piper Jaffray analyst Gene Munster estimated.

"While we expect the lower cost iPhone will ultimately impact margins, we believe the opportunity for Apple is too large to miss as the low end market is growing significantly faster than the high end smartphone market," Munster said.

Wall Street Pressure

Howe was skeptical of Apple producing a product solely to compete with others on price. "Apple's product strategy is to produce the best possible product it knows how to, not the cheapest," he said, "so developing something just for cheap as the goal is unlikely."

On the other hand, China may force Apple's hand on the issue. "China is a great excuse to do it if there ever was one," ABI Research mobile devices analyst Michael Morgan told MacNewsWorld.

One strategy Apple has employed to bring lower-priced iPhones into the market has been to offer older models at discount prices. Even then, an iPhone 4 sells in China for US$490. "China Mobile would have to do an unheard-of level of subsidization to allow Apple to play there," Morgan said.

A lower priced iPhone will be important to Apple if it wants to make inroads into China and other emerging markets where they have very low penetration, according to IDC analyst Bob O'Donnell. "It's a very realistic possibility," he told MacNewsWorld.

"Apple needs a product that will sell, without subsidy, for $150," he observed.

In the past, Apple has resisted letting pricing dictate what products it produces. "It can't continue to live that way, especially if it expects to see the kind of growth it has seen in the past," O'Donnell maintained. "That's what Wall Street is expecting of them."

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