Is China Mobile Preparing for Apple’s Arrival?

Is Apple (NASDAQ:AAPL) on the verge of laying the cornerstone for its Chinese smartphone market ambitions? Various reports seem to point to an upcoming deal between China Mobile (NYSE:CHL), China’s largest carrier, and Apple. China Mobile has over 700 million subscribers in the Greater China market.

After returning from a trip to China, Morgan Stanley (NYSE:MS) analyst Katy Huberty wrote in a note to investors that Apple is in the process of acquiring “TD-LTE licenses, and related phone launches are expected by year-end.” China Mobile currently has a limited TD-LTE network but is supposedly working on expanding its range.

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The Taiwan-based DigiTimes reports that “China Mobile will start an open-bid competition process as early as in mid-May to procure equipment of 200,000 TD-LTE base stations as well as equipment of 110,000 TD-SCDMA base stations which can be smoothly upgraded to support TD-LTE.”

Taken together, these reports suggest that China Mobile is gearing up to become a major iPhone carrier. According to statistics from the industry research firm Canalys, Apple currently holds the fifth place spot in China’s smartphone market rankings, with an 8 percent share of the total Chinese market. Samsung (SSNLF.PK), Apple’s biggest competitor, currently holds a 20 percent share of the Chinese smartphone market. The Chinese smartphone market has grown exponentially in the last few years and is now approximately three times the size of the U.S. market.

Unfortunately for Apple, China’s smartphone market is driven by low-cost smartphones that are typically unsubsidized by carrier plans. This makes Apple’s smartphones prohibitively expensive for the majority of Chinese consumers. In China, Apple’s iPhone 5 sells for 5,288 yuan, or about $862.

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However, if the Cupertino-based company were to introduce a low-cost iPhone, it would be able to seize a greater portion of the burgeoning Chinese smartphone market. In her note to investors, Huberty wrote that “even in a scenario of low 40 percent gross margin and one-third iPhone cannibalization rate, the iPhone Mini adds incremental revenue and gross profit dollars.”

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