How long can China fuel Apple’s record profits?

How long can China help fuel Apple’s record profits?

30 APR 2015

NEW BLOG: Apple reported another staggering profit of $13.6 billion for its fiscal second quarter (January-March 2015), with iPhone sales surging 55 per cent to $40.3 billion as shipments increased 40 per cent.

Much of that outstanding growth can be credited to Greater China (China, Hong Kong and Taiwan), where sales expanded 71 per cent last quarter year-on-year to almost $17 billion. The region now accounts for 29 per cent of Apple’s total turnover, pushing it past Europe to make it the second largest market after the Americas (37 per cent of total revenue).

Greater China’s sales were just half that of the Americas in the previous October-December quarter, and a year ago the China region brought in 21 per cent of total sales.

With a strong boost from the Chinese New Year in February, revenue managed to increase 4 per cent from the huge Christmas quarter, when sales in China jumped 68 per cent. Sales in all other regions dropped between 19 per cent and 37 per cent sequentially last quarter.

China likely has already become the largest single iPhone market in the world. A UBS analyst report in January noted that China accounted for more than a third of iPhone 6 shipments in Q4, with the US making up less than quarter. A year ago China had a 22 per cent share of iPhone sales.

The larger-screen 6 Plus has proven extremely popular in China, where consumers have had pent up demand for an Apple phablet. The fact that the 6 Plus in the mainland accounts for an estimated 60 per cent of total iPhone 6 sales has helped boost the average selling price to around $687. The ratio in the US is about 1:3. This no doubt has had a material impact on Apple’s swollen bottom line.

And let’s remember that the iPhone has only been available – through legal retail channels – in the mainland since October, during which time its market share has more than doubled to 12.3 per cent at the end of March, according to Strategy Analytics.

These gains have come despite the device costing 20 per cent more (both the 16GB iPhone 6 and 6 Plus) in the mainland than in Hong Kong, one of the most expensive cities in the world.

Looking ahead to when China is likely to close the 8-point gap with the Americas, the country has a huge upside compared to most markets. It has a massive population of more than a billion people, a rapidly expanding middle class and is one of the top markets for luxury goods in the world.

It is by far the largest smartphone market in the world, with 420.7 million units shipped in 2014, according to IDC. The market continued to expand in Q1, rising 17 per cent to 110 million units, Strategy Analytics reported today.

Currently less than half of the country’s 1.3 billion mobile connections are mobile broadband, according to GSMA Intelligence. Smartphone penetration is just over 60 per cent, compared to over 70 per cent in neighbouring South Korea and nearly 70 per cent in the US.

But Apple is more than just smartphones. Last quarter App Store revenue in China doubled, iPad sales expanded sharply and Mac sales rose 31 per cent – nearly double the worldwide growth rate. And many are expecting brisk demand for the Apple Watch in a nation where the instrument on the wrist is a vital status symbol.

It’s just a matter of a couple of quarters before China takes over the top spot. By then Apple hopefully will be less dependent on phones to keep its share price high. iPhones accounted for 70 per cent of revenue and a far greater percentage of the company’s profit given their sky-high gross margins.

China — even without including Hong Kong and Taiwan (with a combined population of 31 million) — will no doubt be Apple’s main growth engine moving forward. The company is planning to double the number of stores in the mainland to 40 next year (it has 265 in the US) and has been negotiating with the government to pave the way for the entry of Apple Pay.

The bigger question is can even a huge growth market like China, which is starting to slow down, keep Apple’s earnings at record levels for much longer?

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.


Joseph Waring

Joseph Waring joins Mobile World Live as the Asia editor for its new Asia channel. Before joining the GSMA, Joseph was group editor for Telecom Asia for more than ten years. In addition to writing features, news and blogs, he...

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