The highly anticipated release of the iPhone 5 in China, Apple Inc's
second-biggest market, failed to stop the recent share slide of the
world's most valuable technology company on Friday, and analysts said
Apple's longer-term China hopes may hinge on a partnership with the
country's top telecoms carrier.
Apple's latest iPhone, sporting a
larger 4-inch screen and 4G capability, was launched in the United
States and 30 other countries in September, when the company sold more
than 5 million of the devices in the first three days.
Apple's
shares, however once among the most desirable of portfolio holdings have
headed steadily lower since September on growing uncertainty about the
company's ability to fend off unprecedented competition. This year saw a
surge in sales of Amazon.com Inc's cheaper Kindle Fire and Microsoft
Corp's first foray into the tablet market with its Surface.
Unlike
the crowds that the iPhone 5 debut drew in many cities around the world
since September, just one person was waiting at the Apple store in
Shanghai's financial district when its doors opened at 9 a.m. on Friday.
"Some
of our Chinese sources do not expect the iPhone 5 to do as well as the
iPhone 4S," UBS analyst Steven Milunovich wrote in a note to clients.
China is Apple's fastest-growing market, bringing in about 15 percent of total revenue.
"In
absolute terms, this (iPhone 5) launch will certainly result in strong
sales for Apple in China. However, in relative terms, I don't believe it
will move the needle enough in market share," said Shiv Putcha, a
Mumbai-based analyst at Ovum, a global technology consultant.
Apple
shares were down 3.6 percent at $510.55 on the Nasdaq on Friday
afternoon. The stock has lost a quarter of its value since hitting a
high of $705.07 on September 21, as it faces increasing competition from
phones using Google Inc's Android operating system.
Cutting forecasts
In addition, analysts cut their forecasts for shipments of the iPhone.
Jefferies
analyst Peter Misek trimmed his iPhone shipment estimates for the
January-March quarter, saying that the technology company had started
cutting orders to suppliers to balance excess inventory.
Misek cut
his first-quarter iPhone sales estimate to 48 million from 52 million
and gross margin expectations for the company by 2 percentage points to
40 percent.
UBS Investment Research cut its price target on Apple
stock to $700 from $780 on lower expected iPhone and iPad shipments for
the March quarter.
The brokerage said it was modeling more
conservative growth for Apple after making supply chain checks that
revealed that fewer iPhones were being built.
The iPhone is
currently sold through Apple's seven stores, resellers and through China
Unicom and China Telecom which together have fewer than half the mobile
subscribers of bigger rival China Mobile.
"Apple's market share
declined because of the transition between the iPhone 4S and 5. Their
market share will recover (with the iPhone 5), but if you don't have
China Mobile, the significant market share gains will be very
difficult," said Huang Leping, an analyst at Nomura in Hong Kong.
Apple has been in talks about a tie-up with China Mobile for four years.
A
deal with China's biggest carrier is seen as crucial to improve Apple's
distribution in a market of 290 million users - which is forecast to
double this year. But the company's failure to strike a deal with China
Mobile means it is missing out on a large number of phone users.
As
the China pie grows, Apple's sales increase, but without China Mobile,
it is losing ground at a faster rate compared with other brands.
China
Mobile and Apple initially said they were separated only by a technical
issue - as the Chinese carrier runs a different 3G network from most of
the world - but that has evolved into a broader and more complex issue
of revenue-sharing.
"China Mobile and Apple still have to solve
many issues, such as the business model, articles of cooperation and
revenue division, but I believe we will reach an agreement eventually,"
China Mobile CEO Li Yue was reported by Chinese media as saying in
Guangzhou last week.
Apple China declined to comment. China Mobile said it had no update to the Apple discussions.
In
addition to Apple's share fall, shares of some of the company's
suppliers were also down on Friday afternoon. Shares of Jabil Circuit
Inc were down 5.6 percent at $17.50, Qualcomm Inc shares were down 3.2
percent at $60.76, Skyworks Solutions Inc stock was down 6.7 percent at
$19.65, TriQuint Semiconductor Inc was down 3.9 percent at $4.65, Avago
Technologies Ltd was down 3.9 percent at $32.38 and Cirrus Logic Inc was
down 6.5 percent at $25.62.
China deal seen eventually
Cutting
a deal with a Chinese state-owned carrier may be less optimal than the
deals Apple is used to in other markets, and analysts note that China
Mobile would not necessarily open the flood gates for Apple.
Ovum's
Putcha believes Apple and China Mobile will eventually strike a deal -
though this would be for an iPhone running on China Mobile's
next-generation network rather than its current 3G network.
Of
China Mobile's 704 million subscribers, only 79 million are on its 3G
network, and Apple has been reluctant to sign up to China Mobile's
underutilized, homegrown TD-SCDMA technology. "Apple likely doesn't see
the return-on-investment in extending themselves for TD-SCDMA," Putcha
said.
China Mobile is currently conducting a trial of its
next-generation network, TD-LTE, which could be of more interest to
Apple, but full-scale commercial use - and an iPhone tie-up - could
still be years away.
Android threat
Meanwhile, rivals are
circling, eating away at Apple's smartphone market share. Samsung
Electronics, Lenovo Group and little-known Chinese brand Coolpad held
the top three slots in the third quarter, according to research firm DC.
All
three have relationships with China Mobile and offer smartphone models
at different price points. Apple competes exclusively at the high end,
and even there, rivals are rolling out models with China Mobile. Last
week, Nokia said it planned to release its latest Lumia smartphone with
China's top carrier, which is also expected to launch Research in
Motion's new Blackberry 10, analysts predict.
"The threat will
still come more from the Android camp where they have many vendors
already working with China Mobile and offering high-end phones," said TZ
Wong, a Singapore-based IDC analyst.
While these smartphones do
not generate the buzz of a new iPhone, Chinese buyers are not known for
their brand loyalty, and this could siphon away users considering an
Apple upgrade.
"I've used a Blackberry, Android and iOS and,
personally, I want to try the Windows 8," said Andy Huang, a 37-year-old
fund manager, who owns most iPad models, an iPhone 4 and a 4S. "I think
the Windows 8 is very innovative."
With a China Mobile deal
appearing to be still a ways off, Apple could always boost market share
by offering cheaper models - the basic iPhone 5 will cost 5,288 yuan
without a contract - though this appears an unlikely route for a
high-end brand.
"If they want to expand market share, probably the
only way to do it here dramatically would be to put out a lower-cost
phone," said Michael Clendenin, managing director at RedTech Advisors.
"It's really uncertain if they'd decide to go that route ... Apple's a
mystery in that regard."
© Thomson Reuters 2012
Unboxing the iPhone 5