Pyramid Points - What Apple needs to do to make China its No. 1 market
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What Apple needs to do to make China its No. 1 market

April 24, 2013

By virtue of its very large population, recent economic rise and expanding middle class, China contributed to over 39% of total smartphone sales in 2012 in the Asia-Pacific region. Pyramid Research expects that with growth propelled by declining prices for smartphones and service plans, 2013 smartphone sales in China will jump 42%, to 204m units from 143m in 2012. That will represent 61% of total handset sales in the country. Looking further ahead, we forecast smartphone sales in China to grow at a CAGR of 22% between 2012 and 2017, reaching 388m units.

That said, China has become an unquestionable opportunity, a smartphone market that can’t be ignored — and for many players in the industry, it has become the most important emerging market. Nevertheless, China has proven to be a complex environment where doing business in the telecom sector can be cumbersome.

Earlier this year, Apple’s CEO, Tim Cook, affirmed that China will one day overtake the US as the company’s number one market. In recent years, Apple has made significant inroads into the Chinese market, such as securing contracts with China Telecom and China Unicom, as well as growing its retail presence in the country. However, the iPhone has not been able to effectively tap the mass market for two reasons.

First, the iPhone is too expensive for the average Chinese consumer. While the smartphone ASP in China stood at $204 in 2012, all iPhone models are currently priced above $400. Second, Apple has not been able to finalize a deal with government-owned operator China Mobile, which as of the end of 2012 had more than 717m mobile subscriptions, making it by far the largest operator in the country. Revenue sharing disagreements and incompatible networks have reportedly held back China Mobile from carrying the iPhone. As a result, the mobile operator has been losing market share to China Telecom and China Unicom, which do carry the iPhone.

Exhibit 1: Market share by operator in China, 2010 vs. 2012

MVNO Share Hong Kong 2009-2012

Sources: Operators, Pyramid Research

In light of its current situation, Apple has a difficult task ahead of it is to make China its #1 iPhone market. In 2012, Apple sold 48.4m units in the US, capturing 37% of all smartphone sales to end users, whereas in China it sold only about 14.6m iPhones — giving it 10% of that country’s smartphone market. Our current forecasts do not show the company achieving its goal over the next five years.

Exhibit 2: Pyramid Research’s Forecast of iPhone unit sell-through in China and the US, 2010-2017

MVNO Share Hong Kong 2009-2012

Sources: Vendors, Pyramid Research

However, all this could soon change. Two scenarios can be laid out.

Scenario #1: China Mobile embraces the iPhone in 2013. After its earnings release in March, China Mobile announced that it will spend about $6.7bn on building its 4G network based on the TD-LTE standard, which will reach more than 500m potential users when finished. We expect the next version of Apple’s iPhone to support this Chinese 4G standard.

Closing a deal with China Mobile will enable Apple to substantially increase its addressable market for iPhones in the country. Anticipating that China Mobile will grow its subscription base at a CAGR of 6.5% over the next five years, to reach 983m subscriptions by 2017, of which 103m will be on the 4G network, we forecast that sales of Apple’s iPhone under this scenario would grow at a CAGR of 33% between 2013 and 2017, with China effectively overtaking the US as the company’s largest market by 2015.

Exhibit 3: Scenario 1 – China Mobile embraces the iPhone in 2013

MVNO Share Hong Kong 2009-2012

Sources: Vendors, Pyramid Research

Scenario #2: Apple launches a more affordable iPhone in China in the fall of 2013. Apple is said to be working on a smaller, less expensive version of the iPhone that could help the company better reach China’s growing middle class of mostly young, middle-income consumers. However, this move can be rocky because it can lead to cannibalization of sales of its existing iPhone line and destroy the aura of exclusivity around its products.

Even assuming a cannibalization rate of its current iPhone model as high as 30%, we believe Apple’s smartphone sales would grow at a CAGR of 30% between 2013 and 2017 under this scenario, effectively pushing China to overtake the US as the company’s largest market by 2016.

Exhibit 4: Scenario 2 – Apple launches a less expensive iPhone in China in the fall of 2013

MVNO Share Hong Kong 2009-2012

Sources: Vendors, Pyramid Research

As a side note, Apple could be getting help from an unexpected source: the Chinese government. In a recent report, the China Ministry of Industry and Information Technology expressed its concerns regarding the country’s dependency on Google’s Android operating system, which captured close to 71% of the smartphone market in 2012. Any action the government might take to address this overdependence will most likely end up greatly benefiting local smartphone vendors and, to a lesser extent, Apple.

— Guillermo Hurtado, Analyst

Related resources:

Pyramid Research China Smartphone Forecast
Forecast updated Quarterly
The Smartphone Forecast tracks annual sell-through of total mobile handsets and smartphones for a ten-year period, including five historical years and five forecast years. Smartphone sell-through is segmented by vendor and by operating system. Granular data is provided for each of more than 50 countries, making Pyramid’s smartphone forecast the most detailed on the market today.

China: Operators Turn to Mobile Data, Broadband to Drive Telecom Market
Country Intelligence Report published August 2012
After the Chinese market showed a strong year-on-year growth of 10.5% in 2010, an even better performance was recorded in 2011 as revenue increased 13.2%. We expect the trend to continue in 2012 as the projected $165.8bn in revenue for the year will illustrate another year of robust growth at 13.8%. The main driver supporting the positive outcome is mobile data, which we estimate to generate $46.0bn in 2012, bettering the $36.4bn in 2011 by 26.4%. The China Intelligence Report is the industry’s best available analysis on market trends, regulatory environments and competitive dynamics, providing detailed competitive analysis on fixed and mobile sectors, tracking market adoption of new technologies and services such as LTE, IPTV and VoIP.

Pyramid Research Mobile Operator KPI Forecast
Forecast published quarterly
The Mobile Operator KPI Forecast measures key performance indicators for up to six operators per country, and breaks down key mobile demand metrics at the operator level. It is available for 84 markets worldwide at the country level. When combined with the standard Mobile Demand or enhanced Mobile Data Forecast, they provide the most comprehensive demand, growth and market share tracking available in the industry today.


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