Will Apple find enough consumers in China to buy its iPhone?

February 3, 2014
February 3, 2014

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Tim Cook believes that emerging markets are the answer to Apple’s stalled iPhone growth. More specifically, China.

On the Jan. 27 earnings call he said:

“If you look at the emerging markets, which is one of the things that I’ve alluded to that we have to grow in these areas and grow at reasonable amounts, in Latin America we grew at 76% year over year. In the Middle East and Africa, we grew at 65%. In central and eastern Europe, we grew 115%. In China, we grew at 20%.”

But other research seems to contradict Cook’s figure. IDC has China’s iPhone market share at 7.3% compared to Kantar’s 19%, which is greater because it focuses on the wealthier Chinese population covering city tiers 1-4 (like Shanghai and Beijing), which include 486 million consumers. IDC’s research measures iPhone shipments to the entire market of 1.3 billion consumers. Kantar’s China iPhone market share estimate appears to be an outlier on the chart, but plotting IDC’s broader-based market share estimate (inside the blue circle) results in an almost perfect correlation to the trend line, proving that in the economically-advantaged parts of China, Apple can grow its market share. In contrast, Android prevails with smartphone price points ranging from ultra cheap to premium across the entire market of over 1.3 billion consumers.

1 China Total Income 2

Comparing Kantar World Panel’s Android and iPhone country market shares to per capita GDP (ppp) gives a clear advantage to Android in markets with low GDP like China and to iPhone in markets with wealthy GDP. How can Apple solve its iPhone growth dilemma if it waits for emerging market economies to grow rich enough to buy the premium-priced iPhones? Focus on the high-GDP urban areas of China with its recently announced partner China Mobile and use market development spending to create consumer preference for its brand.

China Mobile and Apple will promote the iPhone through building out the mobile carrier’s 4G network, which is currently available in only 16 cities, but will grow to 500,000 base stations that cover more than 340 GDP-rich cities by the end of the year. Because China’s terrestrial internet has not been built up like it has in the US and other developed market economies, China Mobile will in many cases be the primary internet service provider to its 750 million consumers that do not have a wired internet option, further fueling demand as China’s consumers become digital.

Cook has pledged to double Apple’s retail stores in wealthy Chinese cities from 10 to 22. Apple needs a strong retail presence because smartphone manufacturers can’t rely solely on mobile carriers to create consumer brand preference or demand. They hardly care about the brand but do need need reliable rich-featured smartphones sold at price points ranging from ultra cheap to premium.

In China, one of the most price competitive markets in the world, Apple has to keep its margins up so that it can spend to build strong consumer preference and influence consumers to overlook cheaper Android smartphones and buy a premium-priced iPhone instead.

Indigenous smartphone manufacturers Huawei, Lenovo, Xiaomi, and ZTE reach consumers without high market development spending by delivering great smartphones in the unsubsidized price range of sub-$150 – $300, which the iPhone doesn’t encounter in developed market economies. The iPhone may lead on style and design innovation but it is 2.5 to 6 times more expensive. With the unsubsidized iPhone 5s priced at $870 and the 5c at $738 in China, Apple will need help from its partner China Mobile and will also need to spend heavily on market development to break out of China’s luxury segment.

Benchmark venture capitalist Matt Cohler’s accurately predicted the future of Apple and Android market share in September 2012 during an interview at tech conference Disrupt in San Francisco stating:

“Apple will obtain all the mobile market share in profitability and Google will have all the market share of units.”

Google doesn’t have the same challenges as Apple, and given its sale of Motorola to Lenovo announced last week, it doesn’t want to dilute its rich advertising margins with low Android smartphone margins. Mobile processor manufacturers such as Qualcomm have produced families of integrated silicon solutions that reduce the cost and complexity of building smartphones with a very broad range of price points. As a result, many electronics manufacturers have entered the market increasing the competition, driving down prices and margins, and benefiting consumers’ pocketbooks.

As an undisputed world leader in product design and brand marketing, Apple has proven in the past that it can disrupt markets and create mainstream consumer product categories such as the iPhone in 2007 and the iPad in 2010. But Apple has yet to prove that it can surgically segment enough wealthy consumers from the 2.7 billion in culturally diverse China and the emerging market economies to matter to Wall Street.

We welcome your comments at ideas@qz.com.  

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