Apple faces challenges in China

Consumers favor cheaper smartphones, analysts say

Chinese women use a non-Apple brand phone to take a photo of themselves outside the Apple retail shop in Beijing Monday, Dec. 23, 2013. Apple and China Mobile announced a long-anticipated agreement Monday to bring the iPhone to the world's biggest phone company. The iPhone, once hugely popular in China, has been eclipsed by the rise of lower-priced rival smartphones from Samsung and Chinese companies. (AP Photo/Ng Han Guan)
Chinese women use a non-Apple brand phone to take a photo of themselves outside the Apple retail shop in Beijing Monday, Dec. 23, 2013. Apple and China Mobile announced a long-anticipated agreement Monday to bring the iPhone to the world's biggest phone company. The iPhone, once hugely popular in China, has been eclipsed by the rise of lower-priced rival smartphones from Samsung and Chinese companies. (AP Photo/Ng Han Guan)

NEW YORK - Apple’s stock rose almost 4 percent Monday, a day after the company announced a long-anticipated agreement to take the iPhone to China Mobile, the world’s biggest phone company.

The deal has the potential to increase iPhone sales in a market where Apple Inc. faces competition. But even with China Mobile Ltd.’s vast state-owned network, marketing power and more than 750million mobile accounts, the iPhone has enormous challenges to overcome in the world’s most populous nation.

Apple’s smartphone is already available in China through two smaller carriers, and though it is popular with well-heeled Chinese customers, the iPhone is losing market share to lower-priced smartphones from Samsung and local brands.

The iPhone 5s and 5c will go on sale in Apple and China Mobile stores beginning Jan. 17. China Mobile customers can register for phones starting Wednesday.

The companies didn’t announce pricing or the terms of the agreement.

The deal comes a month before China’s Lunar New Year holiday in late January, a popular gift-buying season. That “will provide an immediate boost to Apple’s share in China,” said analyst Nicole Peng of Canalys, a research firm.

Apple’s stock rose $21.07, or 3.84 percent, to close Monday at $570.09.

Forecasts of possible increased iPhone sales under adeal with China Mobile vary widely, from 10 million to 40 million. A key issue is whether it leads to additional sales or only prompts existing iPhone owners to switch to China Mobile.

The iPhone will help China Mobile promote its new fourth-generation, or “4G,” network that received government approval this month. But analysts said Apple needed the agreement more than the Chinese carrier. That gave China Mobile leverage in negotiations about how to split costs,which for the high-priced iPhone usually includes subsidizing handset sales.

The iPhone faces tough competition from less expensive smartphones running Google’s Android software. Collectively, Android phones far outsell Apple’s iPhone.

Apple Chief Executive Officer Tim Cook told the official Xinhua News Agency in January that he expects China to surpass the United States as its biggest market. About 50 million iPhones have been sold in China in the past 2½ years, according to analyst estimates.

Although China Mobile has 750 million customers, a survey by Bernstein Research found that some China Mobile customers use smaller carriersfor data service. Apple already has agreements with China Telecom Ltd. and China Unicom Ltd., which have about 455 million mobile accounts.

Apple’s share of China’s smartphone sales declined to 6.2 percent in the third quarter from 7.9 percent a year earlier, according to Canalys. Samsung’s share expanded from 14.1 percent to 21.2 percent during the same period.

The iPhone once was so popular with Chinese gadget fans that eager buyers in Beijing waited overnight in freezing weather for the 4s model. But that excitement had faded by September’s release of the iPhone 5s. Customers said it offered too few improvements.

Samsung’s advantages include being able to offer carriers a mix of phones priced as low as $150 while Apple competes only in the highest market tier, according to analyst James Wang of Canalys.

Any boost Apple gets by becoming China Mobile’s new high-end phone could quickly fade, he said.

“We expect this advantage can only last three months, and Samsung will bring out its next flagship model soon,” Wang said.

As for subsidies, Unicom pays $410 of the iPhone’s $900 cost in exchange for a customer signing a two-year contract to pay a minimum of $30 per month.

Analysts say China Mobile will have to match those terms to achieve significant sales.

China Mobile said it wants to have the world’s largest 4G network. It said it plans to have 4G services available in 16 cities by the end of 2013 and to provide coverage for 340 cities by the end of 2014.

Business, Pages 23 on 12/24/2013

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