Apple's China moment still frustratingly out of reach

BEIJING/SAN FRANCISCO Wed Jan 29, 2014 5:35am IST

A clerk arranges Apple's iPhone 5C phones on racks bearing the logo of China Mobile, at a mobile phone shop in Beijing December 23, 2013. REUTERS/Kim Kyung-Hoon/Files

A clerk arranges Apple's iPhone 5C phones on racks bearing the logo of China Mobile, at a mobile phone shop in Beijing December 23, 2013.

Credit: Reuters/Kim Kyung-Hoon/Files

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BEIJING/SAN FRANCISCO (Reuters) - Apple Inc (AAPL.O) may have to wait a little longer for its watershed moment in China.

A disappointing March-quarter revenue forecast, coupled with surprisingly weak holiday iPhone sales, suggest pundits may have over-estimated initial demand from China Mobile's (0941.HK) 700 million-plus subscribers, a key factor that has pushed its shares 18 percent higher in the fourth quarter.

It raises doubt about the country's appetite for its devices as well as broader concerns about flagging global demand for smartphones and tablets.

Apple and China Mobile struck their deal in December, and iPhones went on sale in January.

The China Mobile deal, which some analysts expected could boost iPhone sales by as much as 30 million units a year, won't be the knight in shining armour that Apple needs to maintain high growth rates, if its own forecasts are anything to go by.

Despite both companies trumping up the deal as a milestone, the iPhone's lofty price tag - starting at about $740, about a tenth of the average urban income of $7,600 - insufficient high-speed 4G wireless coverage, and persistently stiff competition from local players such as Huawei HWT.UL and Xiaomi may keep a lid on iPhone sales growth for now.

Would-be iPhone buyers may also be waiting for the next iteration, which is widely rumored to adopt the larger screens that Samsung Electronics (005930.KS) and other rivals have proved can be more popular with Asian buyers.

"I don't really expect China Mobile is going to sell a lot of iPhones this generation. The other carriers have been selling the device for three months," said CK Lu, a Taipei-based analyst with Gartner.

"But the next generation, if it has a bigger screen, will have a truly huge impact on the market."

Apple declined to comment for this story.

THE GREAT RAMP

China is one of Apple's few remaining geographical areas for growth, alongside Latin America and other emerging markets, with the U.S. and Europe now thoroughly saturated with smartphones.

The company sold 51 million smartphones globally over the holidays - far fewer than the average 55 million expected. That underscores Apple's increasing need to secure sales in China, a market where the majority of mobile users still get by with cheap feature phones, but where the Cupertino company commands a paltry 6 percent market share, according to Canalys.

But the market is also a huge unknown. Some analysts fear that China Mobile may simply end up cannibalizing its rivals, China Unicom (0762.HK) and China Telecom (0728.HK), yielding little meaningful growth in that market.

China Mobile's "impact remains a key wild card," Bernstein Research analyst Toni Sacconaghi said. "To us, the key question is, does China Mobile add new customers for Apple, or simply migrate existing carriers away from other carriers?"

Jefferies' analyst Peter Misek highlighted that China Mobile's high-speed 4G mobile networks had only been established in 16 cities so far, meaning those in other cities would be relying on a 3G network that is not fully compatible with the iPhone.

"China Mobile appears to be contributing less than we expected in the first half," Jefferies' Misek wrote on Monday.

To be sure, the greater China region - which includes Hong Kong and Taiwan - still made an outsized contribution to Apple's revenue growth in the first quarter, which ended in December. Sales in the region leapt 29.5 percent year-on-year, far outstripping global growth of 5.7 percent.

"We've got quite the ramp in front of us and we're incredibly excited," CEO Tim Cook told analysts on a Monday post-results conference call. He said China Mobile's 4G rollout should encompass more than 300 cities by year's end.

However, the December quarter also represented a full three months' worth of sales of the new iPhone 5S and iPhone 5C. In the year-ago quarter, the then-new iPhone 5 only hit store shelves on December 14.

On Monday, Apple CFO Peter Oppenheimer and Cook argued that investors should not be too fixated on that sales forecast, saying underlying demand remained strong.

They explained that the outlook looked softer than expected because of a strengthening U.S. dollar, rapidly crumbling iPod sales, and a difference in inventory levels compared with the same quarter a year earlier that effectively limited sales.

But other analysts surmise that Apple remains priced out. Its iPhone 5C, which many had hoped would finally grant it an unassailable foothold in the market, was just $100 cheaper than the high-end 5S.

On Monday, Cook acknowledged that the glossy 5S, which sported unique features such as a TouchID fingerprint-sensor, was garnering much more attention than its plastic-wrapped, cheaper cousin.

For a bigger bump in revenues, particularly in China, Apple may have to rely on an iPhone with a bigger screen. Samsung's Galaxy Note "phablets" are among the better-selling of its different lines.

"There's too many moving parts to know exactly. There's no doubt that shipments are lower than anybody expected," said Pacific Crest Securities analyst Andy Hargreaves.

"A lot of people got ahead of themselves."

(Editing by Emily Kaiser and Ken Wills)

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