Deal lets Apple in on China’s largest mobile network
Gaining access to an audience it has coveted for years, Apple Inc. said it has reached an agreement to sell the iPhone through China Mobile Ltd., the world’s largest mobile phone carrier with 763 million subscribers.
The deal, announced Sunday, is expected to help Apple reignite its sales growth, which has slowed over the last year.
How successful Apple will be depends in part on how flexible it’s willing to be with the pricing of the iPhone, which remains among the world’s costliest smartphones. Still, analysts have long said that striking a deal with China Mobile is probably the most important thing Apple could do to boost sales.
“Apple has had the Wall Street monkey on their back to show growth, either expanding their current products via distribution or via a new category product like a watch [or] TV,” said Patrick Moorhead, an analyst at Moor Insights & Strategy. “The China Mobile deal is huge for Apple because it provides what they’ve never had: broad distribution in China with the country’s largest carrier.”
The deal also promises to deepen Apple’s complex relationship with a population that has been essential to its success over the last decade. Apple has transformed itself partly by moving most of its product manufacturing to third-party companies based in China.
That move gave Apple a supply chain with speed, cost and flexibility that was second to none. But it also drew controversy as stories about the working conditions in Chinese plants exposed overtime abuses and child-labor violations. Critics often noted that the cost of iPhones, and their limited availability, made them inaccessible to the people who built them.
After becoming chief executive two years ago, Tim Cook, who had overseen Apple’s manufacturing relationships in his previous role at the company, made it a priority to improve working conditions and reboot the company’s relationship with China’s workers. At the same time, he stepped up efforts to forge ties with China Mobile that had eluded the company for so long.
The iPhone has been available on the networks of small China Mobile competitors as far back as 2009. This year for the first time, when Apple launched its iPhone 5c and 5s in September, the new phones went on sale in China the same day they were available in the rest of the world. In addition, many analysts saw the creation of a gold iPhone as a move aimed at Asian markets, where the color is considered lucky.
There had been other signs in recent months that the two sides were inching closer together as China Mobile prepared to launch its speedier 4G wireless network last week. Despite its dominance, China Mobile had also had some customers defect to competitors who carried the iPhone.
But it wasn’t until Sunday that the two sides made their partnership official.
“Apple has enormous respect for China Mobile and we are excited to begin working together,” Cook said in a press release. “China is an extremely important market for Apple, and our partnership with China Mobile presents us the opportunity to bring iPhone to the customers of the world’s largest network.”
Apple did not announce the price of the iPhones, which will be available on the 4G network as well as the older 3G network. Analysts have been pressing Apple to sell a cheaper smartphone to become more competitive in overseas and emerging markets, but so far the company has resisted.
Instead, it has pointed to the popularity in emerging markets of older versions that sell at lower costs such as the iPhone 4 and 4s. But it does not appear that China Mobile will offer those older models.
That could continue to limit Apple’s success in China, some analysts noted. While Apple officially lists the price of the iPhone 5c at $739, and the 5s at $871 in China, competitors sell some Android-based phones for less than $100. The average smartphone in China sells for $270.
Analysts point to that extreme price difference as a big reason Apple ranks fifth in China in smartphone sales, trailing Samsung, Huawei, Lenovo and Yulong.
Despite the pricing challenge, analysts expect the deal to provide Apple a boost. The iPhone 5s and 5c will go on sale Jan. 17 from both China Mobile and Apple stores.
Piper Jaffray analyst Gene Munster estimated in a note to clients on Sunday that Apple may sell 17 million iPhones on China Mobile in 2014 and add 5% to its revenue in its fiscal year ending Sept. 30. Many other analysts have put the estimated figure twice as high. Even with the pricing issues Apple faces, analysts note the size of China Mobile’s customer base is more than double that of the combined customer bases of AT&T and Verizon Wireless in the United States.
But Colin Gillis, an analyst at BGC Partners, sounded a more skeptical note, pointing out that millions of people already use black-market iPhones on the China Mobile network. And he said the quality of smartphone competitors has dramatically improved in recent years, meaning selling to China Mobile customers won’t be a slam dunk.
“The landscape has changed from two years ago,” Gillis said. “Let’s see if this is the salvation for Apple that people think it’s going to be.”
Some Chinese greeted the news with excitement.
Commenting on the deal on China’s social networking site Weibo, a user named Cai Jian noted that some people have bought iPhones using smaller networks like China Unicom, but kept second phones so as not to lose their China Mobile numbers. These users might finally be able to carry just one phone.
“Cooperation is a win-win for both.... With the release of iPhone for China Mobile, those who already carry ‘two guns’ can finally merge their two phones into one,” he wrote.
Zhang Xiaoqiang, 26, who works in sales for a Beijing trading company, was sitting in a cafe Monday morning using his iPhone 4. He said he probably won’t be among those rushing online Dec. 25 when customers can pre-order the China Mobile iPhone.
“I won’t buy an iPhone from the China Mobile store,” he said. “It’s simply too expensive and not very practical. I also don’t like the plan from the China Mobile store. If I want an iPhone 5, I would buy it from the gray market. It’s a lot easier, cheaper and I’ll have the freedom to download any apps of my choice.”
Still, China Mobile is hoping that the availability of the iPhone will galvanize interest in its new, faster 4G network. Despite the price and its being sold only by smaller carriers, the iPhone and Apple’s brand still generate tremendous interest in China.
“Apple’s iPhone is very much loved by millions of customers around the world,” China Mobile Chairman Xi Guohua said in a press release. “We know there are many China Mobile customers and potential new customers who are anxiously awaiting the incredible combination of iPhone on China Mobile’s leading network.”
Twitter: @obrien
Tommy Yang and Nicole Liu in The Times’ Beijing bureau contributed to this report.
