China to drive iPhone sales – despite subsidy cuts

China to continue to drive iPhone sales – despite subsidy cuts

18 AUG 2014
China Flag

NEW BLOG: Neither cuts in handset subsidies, nor rumours of government bans, will dent sales of iPhones in China anytime soon.

Reports earlier in the month that certain Apple products were blacklisted from the government’s latest procurement list set off a flurry of speculation on the impact of the ban on Apple and the iPhone. One analyst went as far as asking: ‘After China bans purchases of Apple devices, is BlackBerry in the catbird seat?’

The Chinese government has since stated that Apple has never been on that list.

A similar frenzy was kicked off last week when China Mobile announced it was reducing spending on handset subsidies by 38 per cent this year. A drop in operator support for handsets would certainly slow sales of high-end Apple and Samsung phones was the thinking.

China’s largest operator, with some 790 million connections, spent CNY15.3 ($2.48 billion) in this area in H1, after the company’s CFO in March called for a 21 per cent increase in subsidies. The company will spend just CNY5.7 billion on subsidies in H2.

China Unicom also announced it will trim back on handset incentives.

The reductions follow instructions from China’s Assets Supervision and Administration Commission for the country’s three mobile operators to reduce subsidies by a combined CNY40 billion over the next three years.

What the pundits are ignoring is that China Mobile is far less dependent on subsidies than its key rivals and a high percentage of subscribers in China are happy to shell out $900 for an iPhone without a contract. (Don’t be fooled by reports noting that China’s lower incomes will temper demand. The country had 2.4 million millionaires in 2013, according to Time. And beyond that, the iPhone is an aspirational brand for tens of millions of others ready to pay any premium to be part of the Apple cult).

A steady flow of buyers flocked to neighbouring Hong Kong to pick up the latest models at a hefty premium until Apple last September opted to launch the iPhone 5 devices in China on the same day as in other stores around the world, thus limiting grey market sales there.

At the beginning of the year, China Unicom and China Telecom both offered the 5s for free with a 24-month plan at about $64 a month. To get the phone for free at China Mobile, customers need to sign up for a 24-month contract for $97 a month. The company charges $625 for the 5s with a two-year plan that costs $31 a month.

China Mobile is relying on its wider coverage and faster data rates – it has been investing aggressively in 4G this year, rolling out 410,000 4G base stations in the first half of the year. And don’t forget, the operator just started offering the iPhone in January (Unicom has been selling it since 2009).

While the iPhone did lose market share in China to Android models (notably low-cost Xiaomi handsets) last quarter, sales jumped 50 per cent after a 28 per cent rise in Apple’s previous quarter (fiscal Q2). During the most recent quarter, China Mobile reported the number of 4G handset models increased from 19 to 242 while the average unit price of a 4G model dropped from $812 to $310.

China now accounts for 15 per cent of Apple’s total revenue – from 2011 to 2013 Apple’s sales in the country doubled to $25.4 billion.

Apple has never been a volume play like Windows and Android – its focus has always been on healthy margins, which the iPhone’s near 50 per cent gross margin attests to. For a glimpse of the future, look no further than the history of the Mac, which continues to demand a premium after 30 years and has always had a low market share.

Expect a strong surge in sales of the larger-format iPhone 6 next month across China.

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

Author

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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