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Dear Apple, Don't Go to China!

December 21, 2013 | About:
Nitish

Nitish

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All the hype regarding Apple Inc.’s (AAPL) deal with China Mobile seems to have vanished now. The company had earlier announced that it had an upcoming deal with China Mobile where China’s largest carrier would sell subsidized iPhones. However, the company recently said that it was still in talks with company which has given rise to the feeling among the people that the deal is uncertain. The market hasn’t reacted positively to this news. The common feeling is that this would affect Apple adversely. However, I think this deal being undone would prove to be blessing in disguise for Apple. Let me cite the reasons for saying so:

Absence of leverage in China:

Apple simply doesn’t have the leverage in China that it has in the US. In spite of the fact that it has a hell of a lot of customers all around the world it would be wrong to say that it same advantage in all the markets that it has in the US. In fact, for that matter, I’d say that Apple would be better off if they don’t go for the deal. The reason is that the Chinese government does not favor those products that are produced outside the nation’s boundaries. Samsung, the South Korean giant, though, has a pretty strong presence in China. This can be owed to the tech giant’s brilliant marketing skills. This apart, even Lenovo and ZTE has a pretty huge market share in China. Xiaomi, widely regarded as the Apple of China has the maximum market share in China. The iPhone bug hasn’t bitten the Chinese yet. This is pretty evident from the fact that the people in China view iPhones as a nice product but not a ‘must have’. So those investors that view Apple from a US-centric perspective are missing the global picture. All in all, it wouldn’t be wrong to say that though Apple has a considerate market share in China it is nowhere close to being a leader there.

Shareholders would bear the brunt:

The China Mobile subsidy deal will eventually happen. This would mean that Apple would have to sacrifice on the profit margins. This is because the company would be bearing the US carrier-like prices with low subsidy. The end result would be that Apple shareholders would be losing. The analysts are saying that a further compression in margin would do the company in.

The road ahead:

The deal with China Mobile isn’t going to help the company at all. The reduction in margins would mean a drop in the shares of the company. The shares are likely to drop after going through a 50 day simple moving average of $528. If the revenues continue to be low for a long time the share prices would hit an all-time low.

The company could also announce a bigger buyback and/or a fatter dividend to cushion any blow. However, these would only be short term solutions.

Apple should go for the deal only after analyzing its impact on its financials. That they would go for the deal is quite certain, what’s there to see is the extent to which would the shareholders be penalized. The investors must therefore play their cards carefully.


Rating: 3.4/5 (7 votes)

Comments

myghitis
Myghitis - 7 months ago
Japan's market share for Apple is 76%.It will be absurd to stay away from China, with over a billion users (750m at china Mobile) at Apple's terms.And furthermore, the uers will demand apple products.Your article does not make any sense. 
AlbertaSunwapta
AlbertaSunwapta - 6 months ago

Mercedes and many other luxury products sell in China.  How are they doing?

Aspenhawk
Aspenhawk premium member - 6 months ago
 So, as the market is always wrong, I would buy some shs for the next 30 to 35 % rise.
taw0311
Taw0311 - 6 months ago

I believe Apple will break through the 50 MA of 528 and continue falling until April 2014. There will be ups and downs during that time but I have never been wrong on Apple in 5 years. Buy on the rumors and sell on the news is an Apple trait. In 2011 I had 9000 calls of Apple for the April? earnings. I bought the calls for the 330 strike price and that week I was talked into selling the calls at a modest profit pre-earnings by a trader at a major brokerage firm. One minute post earnings my 30,000.00 in calls were now worth 770,000. Alas I listened to a broker who wanted commissions for buying and selling and I lost out on the 770,000 profit. Being that I was earning 50,000 a year on my job it crushed me. 3 months prior I had 10,000 puts on Apple when it hit 351. I was told by my broker to get out and I did. I lost out on a 55 dollar a share drop and 300,000. He said you never short Apple. I have made hundreds of thousands shorting Apple subsequently when their "good news" cycle lost steam. Do not fall for the Apple analyst hype of it going to 700-1000 because of China Mobile. That is years away if at all. People buy Apple on the dips. Since 2011 I short on the tops. Works for me. By the way my daughters and all their friends do not like Apple. Their suppliers are employing slaves to make their phones and they keep all their overseas revenue overseas avoiding taxes. This does not go over well with their age group, and it is spreading. They are the most hated stock in their age group (25-40)

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