Apple's New Opportunity in China

Apple employees prepare as the iPhone 5c and 5s go on sale in Hong Kong on Sept. 20 Photograph by Jessica Hromas/Bloomberg

Those visits to Beijing may finally be paying off for Tim Cook. The Apple chief executive has traveled to the Chinese capital at least twice this year in a bid to team up with the most important player in the world’s biggest market, and it finally has a real chance.

The country’s top wireless carrier is China Mobile, a state-run giant with 759 million cellular subscribers and a 66.5 percent market share. The next two largest Chinese carriers have deals with Apple to offer the iPhone, but China Mobile doesn’t. Apple has had on-again, off-again talks with the company dating back to 2007, but the two sides have never been able to reach a deal.

One of the biggest problems has been the 3G system that China Mobile uses, a homegrown standard called TD-SCDMA that Beijing policymakers thought would help China reduce its reliance on technology from overseas. As the country’s premier carrier, China Mobile had no choice: It had to use TD-SCDMA for its 3G network. Its rivals, China Telecom and China Unicom, didn’t. And since the Chinese technology didn’t catch on anywhere else, Apple didn’t have phones that could work on China Mobile’s network. That’s one reason China Mobile doesn’t enjoy the same dominance in 3G, where it has a 45 percent market share.

The Chinese government has now cleared the way for an agreement, though, by granting licenses for 4G networks. Having learned its lesson from the 3G flop, the government is allowing China Mobile to use a standard that operators use around the world, TD-LTE. That should make it much easier for Apple to start selling phones via China Mobile. The Wall Street Journal, citing a source it didn’t name, reports the companies have already signed a deal to begin selling iPhones later this month.

Apple declined to comment to Bloomberg News on the status of talks. Rainie Lei, a spokeswoman for China Mobile, said the companies “have continuously been engaged in talks on cooperation and currently there is no information that can be disclosed.”

A deal now would make sense, since both companies need one another more than in the past. China Mobile is still the market leader, but it doesn’t enjoy the same overwhelming lead it did back in the late aughts. An alliance with Apple could come in handy as China Mobile tries to reassert its dominance. The launch of LTE service “may help China Mobile win back some of the 11 percent of market share it has lost in five years, as it struggled with an inferior 3G network and limited handset choices,” Bloomberg Industries analysts Praveen Menon and John Butler wrote in a note published today.

For its part, Apple is well behind Samsung Electronics as well as such local brands as Lenovo and Coolpad in the Chinese market. Once it reaches a deal with the biggest cellular operator, Apple should be able to target China Mobile’s 3G subscribers, Gene Munster, senior research analyst at Piper Jaffray, told Bloomberg Television’s “Bloomberg West” yesterday. “From Apple’s perspective, that’s the low-lying fruit that they can go after,” he said. “We think conservatively they can get 10 percent of those in a year.”

Teaming up with China Mobile wouldn’t solve all of Apple’s problems in China, a price-sensitive market where even the less-expensive iPhone 5C is out of reach for most users. The average price of a smartphone in China is about $250, but the iPhone 5C costs about $750 and the 5S close to $900, Muster said. “Because of that, the opportunity gets watered down,” he said. An Apple deal with China Mobile, however, would still be “a huge opportunity that can move the numbers.”

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