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Apple's (NASDAQ: AAPL) China Investment

Written By Brian Hicks

Posted August 1, 2013

This week, Apple (NASDAQ: AAPL) took yet another big step in its quest for world telecom dominance.

Nothing is set in stone, but on Tuesday, CEO Tim Cook was in Beijing to meet with Chairman Xi Guohua of China Mobile Ltd. (NYSE: CHL), the world’s biggest mobile carrier, to discuss an agreement for the near future. This trip will mark Cook’s third public visit since becoming CEO in 2011 and his second since January.

apple logoAnd it couldn’t come at a better time, as Apple faced allegations in the beginning of the week from China Labor Watch, a nonprofit out of New York, accusing Apple’s Taiwanese contractor Pegatron (TPE: 4938) of withholding pay and providing poor living conditions to its workers.

In fact, Apple’s image is less than squeaky clean in China, taking a barrage of public relation hits that go beyond its manufacturing partners. Its warranty policies have been brought into question, causing Apple to make a public apology recently to Chinese customers. And on its Chinese website last week, it cautioned users against non-Apple iPhone chargers after a Chinese flight attendant was electrocuted and killed.

But through these problems, Apple charges full steam ahead. Apple knows that China is the cornerstone of its market. Just last year, China surpassed the U.S. in the number of smartphone users.

Right now, China Mobile is not only the largest carrier in the world, but it’s the only Chinese carrier not presently offering the iPhone or the iPad to its roughly 740 million customers.

Cook also had meetings with China’s other main carriers, China Unicom (NYSE: CHU) and China Telecom (NYSE: CHA), on Wednesday. Details of all three meetings were left undisclosed.

Apple currently sells its iPhone in China through a partnership formed with China Unicom in 2009 and since last year with China Telecom. The thing is, those two are small potatoes compared to China Mobile. According to Forbes, they only account for 250 million and 170 million subscribers, respectively.

China Mobile, while covering the majority of the market share, is struggling under its own version of 3G technology that has not been widely accepted. If the two sides did embrace, the iPhone would need to be modified in order to run on its network.

Rotten Apple

Apple has cause for concern lately in its market to the East, and the numbers prove it. Sales in its Greater China region, including Taiwan and Hong Kong, shot down a whopping 43 percent in the third-quarter, according to Reuters. The region accounted for 13 percent of Apple’s quarterly sales – $5 billion – a 6 percent drop off from January through March.

The reason for such a dramatic decrease in sales couldn’t be explained by Apple representatives, but some think demand in Hong Kong may be responsible in part.

And while the iPhone and iPad are offered to subscribers of both China Unicom and China Telecom, they’re missing out completely on the overwhelming majority of the market that is China Mobile, which garners 63 percent of the nation’s users.

With an upcoming issuance of government-sanctioned 4G licenses, if Apple and China Mobile can come to a mutually beneficial agreement and make the required adjustments, then the market share is set for obliteration.


As it stands right now, China Mobile customers are unwilling to adopt their 3G network technology – less than a fifth of them, in fact – leading analysts to believe that if a deal was struck with Apple it would attract a more high-end customer base and set itself up for the impending 4G licensing.

It’s hard to believe that Apple wouldn’t find a way to partner up with China Mobile, but the questions concerning its 3G network do leave the door open for the other two competitors.

China Unicom and China Telecom have the capabilities to carry Apple products. They do it already. And their customer base has latched onto their 3G networks, which are superior to China Mobile.

But the market size is undeniable.

The simple truth: China Mobil needs Apple as much as Apple needs China Mobile.

It’s estimated, according to Reuters, that China Mobile’s market size could bring in about $30 billion by 2015 – that’s if Apple gets involved and drives the demand for mobile gaming, advertising, and e-commerce.

Those same figures, from the Reuters report, claim that 78.5 percent of all Internet users in China gain access through their smartphones. And that number reached 464 million customers by the end of June, up 10 percent from the end of 2012.

So, as we speculate, if Apple did make a deal with China Mobile and with the Chinese government issuing 4G licenses later in the year, it could mean major implications for both companies – greater distribution, faster connections, and the attraction of new users.

Apple’s reach would grow exponentially, just as smartphones are becoming the lifeline of each and every one of us.

They say if you eat an apple a day you keep the doctor away. If you take a bite out of this Apple, all it’s going to do is pay, pay, PAY…


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