9-18-13 6:05 AM EDT | Email Article
 

By John Shinal

 

It's time to wonder how many blows Apple Inc. can take to its growth ambitions in the China smartphone market before it cuts its losses there.

 

News this week that China Telecom has cut its subsidies on the iPhone, which it's been selling for a year, is just the latest in a string of unfavorable happenings for Chief Executive Tim Cook in the world's biggest wireless market.

 

Last month, the company (AAPL) was accused of failing to pay proper import duties (i.e., dodging taxes) and spreading pornography by a consumer protection group affiliated with the government-sanctioned China Law Society.

 

The newspaper that printed the accusation, the Legal Daily, falls under the direction of the ruling Communist Party's Central Politics and Law Committee, according to the South China Morning Post.

 

Uh-oh.

 

The last time Apple was accused by Chinese officials of behaving badly toward consumers there (by offering them less-generous warranty terms than U.S. customers,) Cook was forced to issue a public apology.

 

If Cook hoped that an apology would smooth things over with the authorities in that country, that hope should be discarded soon.

 

Perhaps the biggest concern for Apple investors who were betting on its growth prospects is not what's been happening lately in China, but rather what did NOT happen last week.

 

China Mobile (CHL) , the dominant wireless operator in that country, made no announcement or advertisement signaling that it would begin carrying Apple devices. At the same time, a government agency there approved the new iPhones for use on the proprietary network of China Mobile, which controls two-thirds of the wireless market with over 700 million subscribers.

 

Now, China Telecom (CHA) -- one of the two primary rivals to China Mobile that are already selling iPhones in that country -- just raised the price on the latest model by 27%, according to The Wall Street Journal.

 

To buy the new iPhone 5S with a two-year contract, China Telecom customers must pay 2398 yuan ($390). The same deal on the original iPhone 5 a year ago would have cost them 1888 yuan. Out of contract, the iPhone 5S costs the equivalent of $860. Apple misfires with not-so-cheap iPhone 5C

 

That's not much of a deal for wireless consumers in a country with a wide range of less-expensive Android phones made by Samsung , Lenovo and other large electronics makers.

 

No wonder Apple's sales in China started going in reverse during the quarter ended in June, when they fell 14% from a year earlier, after rising more than 15% during the first six months of Apple's current fiscal year.

 

And the latest market share numbers from Gartner suggest just how much market share Apple is losing in China right now, even as it continues to generate growth and lead the U.S. market in handsets (if not mobile software.)

 

Apple shipped 31.9 million global smartphone units during the second calendar quarter, up 10% from 28.9 million units a year earlier, Gartner said last month.

 

During the same time, Samsung global unit shipments skyrocketed 57% to 71.4 million, boosting its No. 1 market share by 2 percentage points to 32%. Apple's market share, meanwhile, fell by 4.6 points, to 14.2% of the market. China-based Lenovo's share rose 2 points to almost 5%, just behind LG Electronics with a 5.1% market share.

 

If the current trajectories hold, Apple soon will be battling for third place in the global smartphone market, rather than first place.

 

Given all this, why would China Mobile be about to offer Apple any deal on subsidies that would make it competitive for market share among its subscribers?

 

In fact, the wireless market trends in that country -- not to mention the subsidy reduction (and higher iPhone 5S price) by the smaller China Telecom -- both argue strongly against China Mobile cutting any such deal with Apple.

 

Remember that Apple sales were flat in the second fiscal quarter, compared to a year earlier, and analysts expect them to rise less than 1% for the quarter ending this month AND for the quarter ending in December, on that same basis.

 

Yet Wall Street also expects Apple to post revenue growth of almost 7% during the fiscal year that ends 12 months from now.

 

If Apple is becoming a niche player in the world's largest smartphone market, and the company still gets more than half its revenue from smartphone sales, the question for Apple bulls is: Where is overall revenue growth going to come from next year?

 

Here's one answer you can bet on: NOT from China.

 

Shinal owns no position in Apple, its rivals or its suppliers, short or long. Follow him on Twitter @johnshinal.

-John Shinal; 415-439-6400; AskNewswires@dowjones.com

 

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


(END) Dow Jones Newswires

09-18-13 0605ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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