Frost & Sullivan: Growth in China on Hold as Apple Prioritizes Margins over Market Share

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This ICT Beat will argue that Apple’s long-term strategy looks strong, with growth potential in
the enterprise market, the wearables product category, and all supported by the unification of OS
X and iOS.

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Frost & Sullivan: Growth in China on Hold as Apple Prioritizes Margins over Market Share

  1. 1. September 2013 Lawrence Lundy, Consultant, Information & Communication Technologies “50 Years of Growth, Innovation & Leadership” Mobile & Wireless Communication Growth in China on Hold as Apple Prioritizes Margins over Market Share A Shortened ICT Beat
  2. 2. Apple is building the foundations for long-term growth with TouchID, the M7 and the A7 Apple is targeting enterprise customers and China for short- term growth Growth in China on Hold as Apple Prioritizes Margins over Market Share A Shortened ICT Beat © 2013 Frost & Sullivan Page 2 This is an edited version of a longer, more in-depth ICT Beat. To gain access to the full ICT Beat, and for more analysis of the Mobile & Wireless Communication Industry, contact Lawrence Lundy. With the recent release of the iPhone 5S and the 5C, Apple has, for the first time, two versions of the same handset on the market. The 5S includes all of the latest hardware including a fingerprint sensor, an improved camera, and two faster processors. The 5C is Apple’s first foray into the non-premium market, coming with a plastic case and inferior hardware specs, although it does come in a variety of colours. This ICT Beat will argue that Apple’s long-term strategy looks strong, with growth potential in the enterprise market, the wearables product category, and all supported by the unification of OS X and iOS. In the short-term, however, the failure to announce a deal with China Mobile and the high price of the iPhone 5C means that Apple has severely limited is growth potential in the world’s largest smartphone market. TouchID is a true innovation and will revolutionize online payments. TouchID, a fingerprint sensor, is built directly into the 5S’ home button, and users can use sensor to unlock the device and authenticate iTunes purchases. Crucially, in the wake of the NSA revelations, fingerprint data is encrypted and stored locally on the device, where is will not be uploaded or shared with third-parties.The fruits of this technology will become clear when Apple allows TouchID to authenticate purchases other than on iTunes. The M7 processor is the foundation upon which Apple will build a wearable computing business. The M7 is less of an innovation in itself, instead it serves as the foundation upon which Apple’s future wearables business can be built. Billed as a ‘context-aware pervasive system’, the M7 is a processor, that has direct access the accelerometer, gyroscope, and compass bypassing the need for the phone to use the main A7. The 64-bit iPhone 5S is the another step toward a unified iOS across all of Apple’s devices. The 5S is the first smartphone to include a 64-bit processor, shipping with an ARM A7. The new processor offers faster performance, especially for intensive tasks such as video encoding and high-end gaming. The real benefit of 64-bit processors is the ability to address more than 4GB of RAM, which enables it to achieve PC level performance. Free iWork and TouchID is more bad news for Microsoft Apple, unlike competitors Microsoft or Google, derives majority of revenues from hardware not software or services. It therefore makes strategic sense for Apple to offer customers its range of productivity apps, collectvity known as iWork, for free after offering iWork for for free earlier in the year.
  3. 3. China Mobile is the key to growth in China China is the largest smartphone market in the world, accounting for 33 per cent of all worldwide shipments in 2012, and Apple is fast losing market share. It fell from 9 per cent in 2012 to just 4.8 per cent in 2013, and into seventh place behind Samsung, Lenovo, Yulong, ZTE, Huawei, and Xiaomi. Apple already has distribution and subsidy arrangements with both China Unicom and China Telecom, who have 35% of Chinese subscribers on their networks. However it has no access to China Mobile’s 740 million subscribers and 65% of Chinese subscribers. Apple cannot compete with budget Android Manufacturers Agreeing a deal with China Mobile would open up millions of new customers to Apple; however the price of the 5C will still prevent Apple from really competing in China. The 5C not priced as a budget phone - it will retail between 4,488 yuan ($733) and 5,288 yuan ($864). Compare this to the flagship Xiaomi M3- the biggest selling phone in China - at 1,999 yuan ($330), and the Lenovo K900 IdeaPhone at 3,299 yuan ($539). The financial markets felt that this was a dissapointing launch with Apple’s shares down 2.3% shortly after the announcement. Markets are, of course, reactive and are always looking for short- term gains.They tend to underestimate long-term features such as the A7, M7 and TouchID. With the two new iPhones, Apple has shown that it has a longer-term strategy built around payments, wearables, enterprise, and a unified operating system. Despite the numerous positives, the real disappointment is the high price of the 5C and the failure to announce a distribution deal with China Mobile. Even if a deal is agreed later in the year, the price of the 5S will mean Apple is only likely to achieve marginal growth in China. By insisting on maintaining such high margins on the iPhone, Apple have serverly curtailed their potential growth in China. To gain access to the full ICT Beat, and more industry analysis contact: Lawrence Lundy Consultant, Information & Communication Technologies, Frost & Sullivan Telephone: +44 20 7343 8322, Email: lawrence.lundy@frost.com Twitter: @lawrencelundy LinkedIN: http://uk.linkedin.com/in/lawrencelundy Growth in China on Hold as Apple Prioritizes Margins over Market Share A Shortened ICT Beat About Frost & Sullivan Frost & Sullivan, the Growth Partnership Company, works in collaboration with clients to leverage visionary innovation that addresses the global challenges and related growth opportunities that will make or break today’s market participants. For more than 50 years, we have been developing growth strategies for the Global 1000, emerging businesses, the public sector and the investment community. Is your organisation prepared for the next profound wave of industry convergence, disruptive technologies, increasing competitive intensity, Mega Trends, breakthrough best practices, changing customer dynamics and emerging economies? Contact Us: Start the discussion Margins over Market Share - A Missed Opportunity in China

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