With 5 billion from China, Apple’s slump is over (but it wants ‘to do better’)

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Yesterday, while Asia was asleep, Tim Cook announced Apple’s earnings for the fourth quarter 2013 and revealed that sales in China had bounced back slightly after a lackluster summer. Over the past three months the company generated US$5.733-billion in revenue from sales in Greater China (which includes Taiwan and Hong Kong), up 24% from the previous quarter and six percent year-on-year. Overall, the company generated revenue of US$37.5-billion this quarter and raked in a net profit of US$7.5-billion.

Cook also noted that the company generated US$27 billion dollars in revenue from Greater China for the full fiscal 2013, up 14% from the previous year.

The sales slump in Greater China during the previous quarter (which clocked in at 4.6-billion, marking a 43% sequential drop) has been attributed to many possible factors. The comparatively early rollout of the iPhone 5 in China pushed most revenues back to Q1 2013, leaving a lull in the product line. Cook, meanwhile, blamed the drop on slow sales in Hong Kong, noting that units sold in the mainland were in fact up 5 percent from the previous quarter. In any case, save for the doomsayers, most agreed that the slump was a bit of a fluke.

With the release of the iPhone 5s and 5c in September, a rebound was to be expected. Cook described Apple’s performance in the country as “pretty good” but added the company did “obviously want to do better.” The CEO argued that the Apple’s expanding reach in China contributed to the bounceback, stating:

We opened one additional store in greater China in the last few weeks; we’re investing in indirect distribution; our point-of-sales are up by about 50% year-over-year on the iPhone; and we’re continuing to go out to more cities. Initially, we were very focused on just the large cities, and so we’re working on both coverage, on launching earlier and execution, and continuing to build out our retail practice there.

Still, some analysts say that the six percent revenue increase is disappointing given the company’s launch of two new devices, and noted that the company experienced a 8 percent drop in global net profits.

China Mobile to the rescue?
Other than the domestic launch of the iPhone 5s and 5c, the other Apple event China watchers have been anticipating this year is the company’s expected deal with China Mobile, the largest telco in the country. A carrier subsidy from such an enormous company could help make Apple’s products more affordable to millions of China Mobile subscribers, thereby bolstering sales and deepening market share.

However, a deal with China Mobile won’t necessarily solve all of Apple’s problems. Apple needs China Mobile far more than China Mobile needs Apple, and since the telecom is in a more advantageous bargaining position, the Cupertino firm is in a position to get a bum deal with low margins. And if that happens, investors eyeing the slowing net profits won’t be pleased.

Case closed on the “c” in “5c”
In an interesting side note during the conference call, Cook laid to rest any notion that the iPhone 5c was ever intended to be a “cheaper iPhone,” or as some expected, the mid-tier solution to Apple’s market share woes in countries like China. The CEO stated:

I realize that some people were reading rumors that our entry-level iPhone was the 5C, but that was never our intent. Entry level phone was iPhone 4S. As you know from comments that I’ve made previously, we were selling the iPhone 4 in very good volumes. And as we begin to experiment in different regions at somewhat lower price points, we saw a fair amount of price elasticity. And so we’re hoping and thinking that will continue with the 4S.

All things being equal, what we would normally see on our products is that you have a large number of people who are early adopter related, that come into the market right after we announce and buy our very best product. And so other things being equal, that’s what we expect to see.

We shouldn’t read into these comments too deeply, but they would seem to indicate that Apple remains committed to its strategy of selling state-of-the-art devices at relatively high margins, and that market penetration will be taken care of through Apple’s current strategy of inking carrier subsidies and expanding sales channels, rather than through competitive pricing.

Apple currently occupies 4.8 percent of the China’s smartphone market (according to Canalys), ranking number six, behind domestic darling Xiaomi.



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