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Apple Must Adapt for Emerging Markets

NEW YORK (TheStreet) -- China's Huawei Technologies is striving to top Apple (AAPL - Get Report) in smartphone sales to emerging markets with its trademark low-cost approach.

On Monday, Huawei reported 34% profit growth for 2013 as it become the world's third-biggest smartphone maker, and said that it is aiming to double its revenue over the next five years.

Huawei has achieved its success by flooding emerging markets with low-priced smartphones, while at the same time gearing more high-end offerings to advanced economies.

Although the company's primary business has been building mobile telephone networks, smartphones will most likely be the new featured product as annual growth could reach as high as 10% during the next few years.

The company is not alone in its crusade to become the largest smartphone provider to emerging markets. Last year, Apple released new versions of its iPhone geared specifically as a low-cost option to consumers in emerging markets.

The new iPhone 5s and 5c were cheaper than previously released iPhones, but analysts warned that the new models are still too expensive in many emerging markets.

The cheaper iPhone 5c is supposed to address a wider market, but it sells for over $300, making it equivalent to the average monthly income of a middle-class consumer in Russia.

Although some emerging-market consumers are willing to shell out a month's salary for an iPhone, for Apple to have a truly global product it must allow profit margins to contract and offer a cheaper phone.

Apple needs to accept emerging markets for what they are. Developing economies offer size and the potential for many new customers, but not a big group of high-net worth individuals.

Huawei will continue to sell low-cost phones in emerging markets, while trying to improve the image of its products in developed economies.

Competition in the smartphone market will be defined by two narratives during the next five years.

First, companies will need to exploit the growth in China as the country's telecom carriers have recently shifted to 4G mobile-network technology. The move to 4G allows smartphone makers to offer diverse phone options that introduce the Chinese consumer to a vast app store, with the potential to profit off of both eBook and game sales.

Next, smartphone makers must still offer phones in developed countries that consumers will be willing to pay more for. 

Apple and Huawei are both looking to achieve the same goal the next few years, but are beginning at vastly different points.

Apple has a strong hold on the developed world, but needs to adapt to a lower cost option to match the success it has had in the U.S. and Europe, while Huawei will continue to benefit from the growing Chinese market, but will need to rebrand itself in the developed world to take market share from Samsung Electronics (SSNLF) and Apple.

AAPL Chart
AAPL data by YCharts

At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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