beyondbrics

You can slice, dice and knock the numbers however you like. But come on guys, let’s be honest here. Apple hasn’t done too shabbily in China. First-quarter revenue came in at $6.8bn, a 26 per cent increase quarter-on-quarter and a 67 per cent increase year-on-year.

Sure, there were many reports in the run-up to Wednesday’s Q1 earnings lamenting the company’s falling share of China’s burgeoning smartphone market. Yes, Apple’s ranking in China has dropped to sixth from third. And yes, Apple is being outsold by a local outfit that is less than 1 per cent its size.

But does Apple really need to have 50 per cent or even 20 per cent of the Chinese smartphone market to do well?

Let’s step back here and remember that Apple is a luxury brand and the company still ranks in the top five of the most coveted brands among China’s monied class, according to the latest Hurun Chinese Luxury Consumer Survey.

And like any premium product, the story is not necessarily about quantities sold, but rather the margin that can be made on each unit. (Hermès anyone?) In other words, when it comes to a relatively high margin product like the iPhone, Apple doesn’t need to increase its sales by anywhere as much as those on the low-end to make its China business pay.

Which brings us to Coolpad, a subsidiary of Shenzhen-based China Wireless Technologies that is grabbing market share by selling smartphones for as little as RMB658 ($106). This is undeniably cheaper than iPhones, where prices start at RMB3,088 ($496).

But Coolpad’s surge in sales growth has come at a cost. Gross profit margin at China Wireless was 12 per cent in the six months to end of June 2012, down from 16.8 per cent from the period the year before. This is less than half of the 38.6 per cent in gross profit margin reported by Apple for Q1.

As Lisa Soh, an analyst with Macquarie Group, told Bloomberg on the subject of China Wireless’s recent market share gain:

I still have some questions on the sustainability of those market-share gains, and whether they can turn those gains into profits.

The argument for Apple to sell a cheaper iPhone to regain market share in China would carry a lot more weight if the company was seeing a decline in or a flattening of iPhone sales.

But far from it. As Tim Cook said in Wednesday’s call with analysts:

We saw the highest growth [in iPhone 5 sales] in China … into triple digits.

And let’s take a look at those China revenue figures again (click to enlarge):

The numbers are all the more impressive given that China Mobile, the country’s biggest mobile operator, doesn’t distribute iPhones.

As for those widely-cited market share rankings from IDC?

Well, actually, even the analyst who put those numbers together conceded that they need to be taken with a grain of salt.

Here’s what Teck Zhung Wong, senior market analyst at IDC, told beyondbrics (emphasis ours):

One thing to bear in mind is how much the size of the PRC smartphone market has grown. The PRC smartphone market size in 2012 Q3 was greater than 60 million units, nearly 2.5x larger than a year ago. Given this context, I’d argue that Apple hasn’t done that badly at all, in spite of its range bound market share.

The introduction of a new Apple financing scheme in China last week could be one way for the iPhone maker to recapture market share without going down the low-end route. But this remains to be seen.

Bottom line: few would argue that Apple is doing poorly in China. If you have any lingering doubts, just look at the Q1 results again. Apple for the first time ever broke out its Greater China (mainland China, Taiwan, Hong Kong) revenues. You don’t do that unless you are confident that you are doing something right. Especially not when the company in question is Apple, which is notorious for keeping tight control over information.

Related reading:
Apple stock sheds 10% on growth worries, FT
Apple: bucking the China doom and gloom, beyondbrics
Apple in China: less froth but still pretty darn impressive, beyondbrics
Apple Q2: it’s all about China, beyondbrics
Apple fans consumer flames in China, FT
Apple looks to China’s ‘staggering potential’, FT