Chinese Demand Could Juice Apple

 | Dec 17, 2012 | 3:30 PM EST
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The last few weeks have been particularly brutal for Apple's (AAPL) stock price, which has been fluctuating wildly.

Besides the fiscal cliff concerns and people wanting to lock in some of their capital gains from 2012 before a potential rise in the rates, a lot of Apple bears have been talking about margin pressure as a big reason why investors should be worried about Apple.

To that point, I received an interesting email over the weekend from one anonymous reader (who is long Apple) about Apple's prospects in China, specifically with regards to the iPad Mini.

I have been thinking a lot lately about Apple's long-term prospects in some key markets like China and all the chatter about the iPhone losing share to lower end smartphones and how they need to have a cheaper iPhone in emerging markets.

 I think Apple will concede the loss of iPhone market share for the time being, working with carriers who want to subsidize the iPhone, and maintain the premium brand status in smartphones. However, I think the iPad is a different story and the market is missing this bigger story:

  • Consider that the company has 71% of the tablet market in China today
  • Consider that the up and coming China smartphone makers are selling their SMARTPHONES at roughly the same ballpark price as the iPad Mini:
    • Meizu MX2: RMB 2,499 ($400).
    • Xiaomi Phone 1S RMB 1,299 ($210) or RMB 1,499 ($240)
    • Xiaomi Phone 2 RMB 1,999 ($320)
  • Consider that these companies have the same business model as Apple (i.e., they need to sell units to make a profit) and can't rely on content sales to make their money (unlike Google (GOOG) and Amazon (AMZN)). If we assume that Google and Amazon (huge companies with huge purchasing power) are basically pricing their tablets at break-even, then these Chinese companies will have to sell their tablets between $200-$300 to make any kind of profit.

My conclusion is that the iPad Mini is priced extremely competitively to take on any tablet maker in China and they will probably keep 60-70% market share in China for a few more years to come. If Meizu and Xiaomi (who are considered the disruptive smartphone entrants in the Chinese market) are selling their smartphones at these prices, how will they get the price of a tablet low enough to create enough of a value difference vs. the iPad Mini that starts at $329?

With the iPhone, the value proposition was/is easy for consumers to buy Meizu or Xiaomi smartphones: they are more than 50% cheaper than the iPhone 5. But if their tablets only come in 10%-30% cheaper than the iPad Mini, is that going to be enough of a price difference for Chinese consumers to choose these products vs. the iPad Mini? I think China consumers recognize "value-add" (build quality, app ecosystem, etc.) as much as any other international consumer.

In retrospect, I think Apple set their price of the iPad Mini to compete and gain market share in the China market. That is where the real war for growth and platform is and will be fought.

The disappointment in the market of Apple not coming closer in price with Google and Amazon tablet offerings means that the market could be missing the bigger picture: the competitiveness of the iPad Mini in China and the potential dominance the iPad Mini could have in China.

The iPad Mini will create that halo effect in China for Apple, the same way the iPod and iPhone created that halo effect for Apple in Western markets.

I agree that most Apple investors seem to be forgetting about the whole China opportunity for Apple these days, especially with respect to the iPad Mini. One thing that's clear to me from my travels to China is that the Chinese prefer bigger screens on their phones. They like more text on the pages they view and a larger screen is also easier to write Chinese characters on.

The Samsung Galaxy Note has been a hit in China so far. There have been no issues of holding a big tablet-like sized screen to your ear to make a phone call over there. I think Apple has realized this. However, rather than creating two kinds of iPhones with a large and small screen, the company has chosen to make the Mini its competitive offering against the Note. I think it's going to be a hit in China -- especially considering  that there is a lack of cheaper knock-offs.

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