Two new wireless industry measures being pushed by China’s government could hamper the growth of Apple’s (NASDAQ:AAPL) iPhone in that country, according to UBS analyst Steven Milunovich. In a note obtained by Barron’s, Milunovich cited the work of his fellow analysts at UBS who study the Chinese telecommunications market. The analysts noted that the Chinese government is “urging the three telcos to reduce their sales and marketing costs.” China’s three largest telecommunications companies are China Mobile (NYSE:CHL), China Unicom (NYSE:CHU), and China Telecom (NYSE:CHA).
As noted by Milunovich, the government’s push to reduce sales and marketing costs will likely affect the three carriers’ abilities to offer the subsidies that reduce the upfront cost of mobile phones in a market where various taxes make many higher-end devices otherwise unaffordable for most consumers. As a maker of relatively expensive premium smartphones, Apple is especially vulnerable to any reduction in subsidies.
“The State-owned Assets Supervision and Administration Commission (SASAC) is considering a plan for all three telcos to reduce marketing costs by 20% or Rmb35-40bn, out of which handset subsidies likely amount to more than one-third,” wrote Milunovich in a note seen by Barron’s. “Some 50-60% of all phone sales in China are subsidized, and handset distributors suggest sales could be reduced. We estimate the high-end market (>$500 w/VAT) is roughly 20% of sales, of which Apple had a 33% share in C13.” It should be noted that “Rmb35-40bn” is equivalent to $5.6 billion to $6.4 billion at the current exchange rate. “We think Apple sold about 25.5mn phones in China in C13 or 17% of its unit sales. China represented roughly 40% of unit growth prior to signing China Mobile,” noted Milunovich.