Apple Struggles In China, But New Product Could Bring Added Growth Domestically

                                                     

By George Leong, B.Comm

Currently, Apple Inc. (AAPL) is largely considered a commodity stock that needs to excite investors with new innovations and growth in order to propel its long-term growth.

The stock has been stuck in a relatively tight range between $500.00 and $560.00 since late October 2013, as Apple looks for stronger growth opportunities and convinces the stock market that it can expand its business and not just depend on “iPhone” and “iPad” sales.

To this point, the company took a positive step forward after announcing it was launching its “CarPlay” solution for the auto sector that aims at making the iPhone a powerful add-on in the car. The solution will allow drivers with iPhones access to multiple services while driving. The solution will be initially launched with high-end automakers, such as Ferrari, Mercedes-Benz, and Volvo, but it will eventually be available across a much wider auto segment.

The introduction of CarPlay is critical, as it will expand the use of the iPhone for users and also help to drive sales. The car solution comes at a critical time in the recent aftermath of BlackBerry Limited’s (BBRY) announcement that it would be replacing Microsoft Corporation (MSFT) as the information solution in cars made by Ford Motor Company (F). This is a key area of growth, and Apple’s innovation is the kind of development investors want to see.

While Apple continues to be the market leader in the premium smartphone and tablet market around the world, the company also needs to deliver alternative avenues of growth. Of course, Apple needs to grow its market share in the key emerging markets; so far, this has been difficult due to the higher price of the iPhone in areas where income levels are much lower and service providers don’t offer discounts on devices if a client signs a contract. Apple appears unwilling to produce a cheaper iPhone than its “5C" at this time, but I feel the company will need to do so if it wants to gain any traction in the emerging markets.

The marketing deal signed with China Mobile Limited (CHL) will likely drive Apple to introduce a cheaper iPhone for the massive mobile market in China, especially if the initial sales numbers are weak. Gaining traction in China would be a win for Apple. (Read “How to Play the Growth in China.”)

International Data Corporation estimates Apple will sell 179.9 million iPhones in 2014 for a global market share of 14.9% versus 78.9% for “Android”-powered phones. (Source: “Despite a Strong 2013, Worldwide Smartphone Growth Expected to Slow to Single Digits by 2017, According to IDC,” International Data Corporation web site, February 26, 2014.) Moving into 2018, the market share estimate is expected to hold. The IDC report also suggests Apple will hold its leadership position in the premium market while it struggles in the emerging markets.

My view continues to be that Apple is not catering to the emerging markets because of its focus on preserving margins, which I feel is the wrong strategy. The company has more than $40.0 billion in cash and could easily absorb lower margins in the emerging markets on an effort to expand its market share in China. The Chinese market is critical, but Apple needs to cut prices.

So while Apple wrestles with the idea of producing a cheaper iPhone for the emerging markets, the launch of its CarPlay car solution is intriguing; it’s what investors want to see.