Apple’s Coming to China!

Posted by Wayne on June 11, 2008 – 5:43 pm

A TickerHound member asked:

Why isn’t the iPhone in China?

Good question!  But I think the better question is, why isn’t the iPhone in China YET?

After months of failed negotiations between Apple (Nasdaq: AAPL) and China Mobile (NYSE: CHL) – the largest mobile service provider in the world in terms of subscribers – the companies parted ways.  And since then we haven’t heard much from Apple with respect to moving the iPhone into China.  Some may have assumed, incorrectly, that Apple was just going to ignore the issue for the time being.

But after Apple’s announcement on Monday, I think it’s clear that while negotiations between the two companies may be at a standstill, they won’t stay that way for long.

The Chinese wireless market is by far and away one of the most desired mobile markets on the planet.  This is a country with roughly 1.4 billion citizens and not even half of them have a mobile phone yet.

There’s a tremendous opportunity for growth here and Apple knows it.

So while a deal hasn’t been reached to bring the (genuine) iPhone to China yet, Apple’s definitely gearing up for it.

At Steve Job’s keynote the other day he presented the world with “iPhone 2.0”.

Aside from the widely covered feature additions like 3G wireless technology, GPS, reduced price point, etc., Apple unveiled a feature that I personally jumped out of my seat for, and it’s geared directly for the Chinese market.

Texting and E-mailing in China

Having lived in China for a period of time I can attest to the difficulty in sending Chinese text messages and e-mails from a mobile phone.  Typically you’ll have to type the message using a spelling system known as pin-yin.  Pin-yin is the transliteration of Chinese words into westernized spelling.

So if I wanted to type “hello” in a text message, I’d have to type “ni hao” using a western keyboard and that would then be translated into the appropriate Chinese characters.  Obviously the use of a stylus would make things much easier.  In fact, that’s exactly what Motorola (NYSE: MOT) had in mind when they launched the Motorola Ming in China two years ago.

And that’s precisely what Apple had in mind when they launched their Chinese character recognition software on Monday.

With the latest version of the iPhone I can use my finger to write out Chinese characters directly on the screen.  This will make writing text messages and e-mails dramatically faster.

So the real question becomes, what would it mean for Apple’s business if it secured a significant share of the Chinese handset market?

Well, let’s look to the Motorola Ming for an indication of what may be in store for Apple.

The Ming and Market Share

Estimates vary but the consensus is that the Motorola Ming had roughly 1% of the entire Chinese handset market at the beginning of 2007.

Given that China has a mobile subscriber base of 583.5 million people now, that would mean 5.8 million phones by today’s numbers.  It would be easy to make the argument that the iPhone has much more hype, demand, functionality, etc. built around it and therefore could reasonably capture more of the market than the Ming, but let’s be conservative here.  Let’s assume Apple is able to sell 5.8 million iPhones in China.

If Apple sticks to their $200 price point for the 8 GB model – which is certainly realistic considering the Ming’s price point was in the upper $400’s – then that would equate to roughly $1.16 billion in additional top line revenue for Apple.

And if you consider the “halo” effect Apple’s products tend to have (sell one product, you sell more of the others), then it’s easy to see how substantial adoption of the iPhone could turn China into an increasingly important source of revenue for Apple overall.