Apple in China


January 8, 2013 (2:20 pm)

I wanted to bring an article Nick Nansen just posted to your attention: China Mobile and Cheap 5″ iPhone for China Back in Spotlight. First, because I enjoy reading Nick’s articles. They are usually very insightful and not blinded by pure optimism like many other Apple investors. Second, because Nick brings up a very crucial aspect of Apple’s long-term success and growth.

Let us briefly digress before returning to his article. Recently, there has been hushed speculation about a new iPhone 5S being released in June 2013. This breaks from the typical annual introduction of a new iPhone. The rumors are that Apple is moving to a semi-annual iPhone introduction to better compete with Samsung. What made this interesting, from our point of view, was that there was also speculation that Apple and China Mobile would likely sign an agreement towards the middle of 2013. It would make a lot of sense in our eyes for Apple to simultaneously announce an agreement with China Mobile and launch its brand new iPhone 5S (or maybe the iPhone 6, who knows what they’ll call it) with that carrier. The benefits are many.

  1. Allowing China Mobile to sell it first would be a way for Apple to sweeten the deal, without giving up economic terms.
  2. China is the most important region for Apple’s growth going forward.
  3. An iPhone introduction there would be very symbolic to the Chinese population.
  4. It would shift the sentiment in that region from more of a ‘second thought’ behind the U.S. to a premier target audience.

Back to Nick’s article. He places a 50/50 likelihood that Tim Cook’s current meeting’s in China could result in an “imminent” agreement with the Chinese government-controlled China Mobile. If we were to see an agreement in the near-term, shares would very likely explode to the upside. Think about this. The number of China Mobile customers more than doubles the entire population of the entire U.S. The potential rate of growth there is startling. If Apple were able to sell an iPhone to just 15% of the customers using China Mobile, they’d sell as many iPhone’s as they sold over the last year globally.