Apple (AAPL) shareholders are ecstatic over the iPhone maker’s expected deal with China Mobile, the world’s largest mobile carrier. But while Apple may win big, some competitors, especially Samsung Electronics (005930.KS) and HTC (2498.TW), stand to lose.
Once a deal with China Mobile is complete, Apple is expected to more than double its sales in China, growing much faster than the overall smartphone market there and taking market share from two of its leading Asian competitors.
Cheap phones made by local producers such as ZTE and Xiaomi Tech dominate much of the Chinese smartphone market, which will have estimated sales of more than $70 billion this year. But with hundreds of millions of subscribers, that still leaves tens of millions who can afford to pay more and often seek out the cachet of foreign brands. China Mobile, with almost 800 million subscribers, is not just the largest carrier but also the most popular with more-affluent customers.
“The great thing about the Chinese market is a small slice of the pie translates into pretty significant sales,” says Ken Hyers, an analyst at Strategy Analytics.
Or as analyst Benedict Evans tweeted, only half-joking:
The iPhone is so expensive that only a couple of hundred million Chinese people can afford it.— Benedict Evans (@BenedictEvans) December 5, 2013
The potential challenge to Samsung in China comes at a terrible time, as global shipments of its flagship Galaxy S4 have fallen short of expectations. Samsung shares shares plunged more than 20% in June and July as the sales shortfall came to light, and they remain off 7% for the year after a slight recovery. Sales in China have been a bright spot as Samsung increased its market share there to more than 20%. Samsung has been winning the battle for those high-end Chinese buyers so far, pitching its top-end models such as the Galaxy S4 and Galaxy Note 3.
"We put a lot of emphasis on the high-end market in China," co-CEO J.K. Shin told Reuters in July. But Apple’s newest 5S and 5C phones have been outselling Samsung’s top-end phones in markets ranging from the United States to India. Local retail phone vendors in India reported much greater interest in the new Apple models, the Indian Express reported last month.
The situation in India should make Samsung investors particularly nervous about the expected Apple deal with China Mobile. Like China, India’s massive phone market is dominated by low-end models. But Apple has used a combination of rebates, trade-ins and financing plans to lower the upfront cost of buying an iPhone.
HTC is in even more dire straights, with its share price down more than 90% since a 2011 high. It has lost market share around the world and lost money last quarter for the first time since 1999. The company has been focusing on China to aid its turnaround, launching the new HTC One Max there three days before events in the U.S., for example. And HTC execs have said it's the high end of the Chinese market they're targeting -- the same as Apple.
Apple could also reach more deeply into the Chinese market, if China Mobile promises to subsidize iPhone purchases for its customers, for example.
“If China Mobile successfully cooperates with Apple, it will put more subsidies on the iPhone and reduce subsidies on other models,” says Canalys analyst Jingwen Wang. “If China Mobile sells iPhone with contract, both vendors which produce high-end models and low-end models will be affected.”
The Apple-China Mobile deal, reported as imminent by the Wall Street Journal on December 5, is as yet unfinished so it’s impossible to know the terms, such as the prices Chinese consumers will pay. But it's likely Apple won't go too far downmarket to compete with Android phones that sell without Google services for under $100.
"There's always a large junk part of the market," Apple CEO Tim Cook told Businessweek in September, referring to the hoards of low-priced Android phones sold in China and other emerging markets. "We're not in the junk business."
But certainly the high- and even the some of the middle-market are where most of the profits are for phone makers in China. And that's where Apple knows best.