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Apple's Decade: The iPhone Taps China

The iPhone launch in China represents the most significant technological product release of our generation.

Editor's note: This is the sixth excerpt of an e-book on Apple by Jason Schwarz, an analyst at Lone Peak Asset Management in Westlake Village, Calif. Here are Part 1, Part 2, Part 3, Part 4 and Part 5.

The third catalyst to contribute to


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$500 is Asia expansion. The company took top honors in

The Wall Street Journal's

Asia 200 survey in 2009, despite reportedly having just 1.6% of the personal computer share in the region and only 0.6% of the total mobile-phone market.

When broken down by attribute, Apple consistently appeared among the top five companies ranked by consumers in Asia. For long-term vision, Apple was second, fifth for quality, fourth for corporate reputation and second for innovation.

In a revealing interview with Kai-Fu Lee, president of


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China, PBS' Margaret Warner extracted some valuable information regarding the Chinese Internet explosion. Lee predicts that a quarter of China's 1.3 billion people will be online by 2009. They're not just more numerous than in the United States. They're different. The average American user is 45 while the average Chinese user is 25.

Even though the Chinese economy is helping to increase the size of the middle class, these young users still don't own their own computers. Internet cafes are open 24 hours a day, and for most of those 24 hours, they are packed with young customers engrossed in games, muovies, music videos, and chat rooms.

The Chinese are craving an inexpensive Internet device to further enable their access to information, entertainment and communication. Perhaps an alternative to the Western world's use of laptop computers will fuel a revolutionary wave of Chinese gadget obsession.

Before the government intervened with the

China Mobile

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monopoly, the company reported 574 million mobile subscribers back in March 2008; the number of mobile subscribers is expected to grow to 738 million in 2010. To put that number in perspective, consider that the entire U.S. population is just over 300 million. Capturing the Chinese market is the prize of all prizes.

To win the Chinese market, one must cater to the Internet demand of the young Chinese but do so on a culturally accepted platform. Computer ownership is not culturally accepted. Cell-phone ownership is. That's where the iPhone comes in.

The relatively inexpensive iPhone caters to the hundreds of millions of people who will trade in their current cell phones for their first-ever opportunity of owning a mini-computer. The iPhone launch in China represents the most significant technological product release of our generation; not only financially for Apple but culturally for China as seven out of every eight households go without the Internet.

Because of the thriving black market for iPhones in China, the official

China Unicom

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launch was met with a lackluster response. That has caused many analysts to assume the product will fail in China as it has in India. China Unicom is sending a different message.

China Daily

reports that an executive at Unicom still expects the iPhone will become the best selling smartphone in all of China, and he expects the iPhone will command 10% of all 3G devices in two to three years.

China Unicom is introducing the subsidized price model in the region, and it may take consumers some time to become comfortable with it. In one of the subscription options, Chinese consumers are able to walk out the door with a free iPhone. Certainly, Unicom and Apple will have to adjust pricing in a way similar to the U.S. approach. The good news is that demand for the iPhone in China is huge, now Apple has to take it back from the black market.

China Unicom recently launched the nation's first 3G network. It's not available everywhere, and it surely will take time to work out the kinks, but nevertheless it is 3G. In a country where only one out of eight households owns a personal computer, 3G Web browsing with the iPhone is going to generate plenty of excitement.

The iPhone's compatibility with the popular Chinese instant messaging service

Tencent QQ

is significant. Some estimate that a half-billion Chinese are logged onto the QQ service. In September, Tencent launched a Web-based version of its product that allows use of the service without any software installation. In the U.S., we text-message and use social networking sites like Facebook and Twitter; in China, they use QQ. Word-of-mouth marketing for the iPhone through the QQ network will be effective.

Many assume that the initial weakness in Chinese iPhone sales mean that Apple is on a path toward failure similar to India. The iPhone launch in India was hurt by a lack of buzz. That does not appear to be the case in China.

Philip M. Nichols, a professor of legal studies and business ethics at the Wharton School of Business, noticed on recent trips to China that the hype was starting to build. "You cannot go into a Carrefour in Beijing right now without getting iPhone advertising right in your face," said Nichols, who visited twice in August. "They are really advertising the heck out of it."

Wharton marketing professor Z. John Zhang adds that Apple could use the grey market to its advantage by capitalizing on the iPhone's existing popularity. "They can say, 'We know you love the product.' That's not something they could do when they initially launched the product in the U.S."

Not one dollar of Chinese iPhone is priced into Apple stock. Yes, Apple's accounting change is a big deal for the stock. Yes, the Mac cycle is a big deal. Yes, the Tablet could become the company's flagship product. Yes, the smartphone bonanza will continue, but don't underestimate the gradual impact of China. With low expectations, the iPhone's lackluster launch will slowly turn into a significant growth driver going forward.

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At the time of publication, Schwarz was long AAPL.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is set to be released by McGraw Hill in December 2009.