Is it even possible for smart phone makers to build, sell, and market a phone in China markets while holding onto the smart phone identity? The answer is a resounding yes, as according to Business Insider the total cost of making an Apple Inc. (NASDAQ:AAPL) iPhone is $209.
Case for Apple in China
China’s GDP per capita has grown from a modest $1,500 to $5,444 in the span of just 8 years. The phenomenal growth in the amount of economic activity per person is incredible. However, while the growth rate is superb, the GDP Per Capita figure of $5,444 implies that the average person may not be able to afford an $800 iPhone.
In response to this, Apple Inc. (NASDAQ:AAPL) will be selling phones at a cheaper price using QUALCOMM, Inc. (NASDAQ:QCOM) chips.
Qualcomm a significant beneficiary
Don’t forget about Baidu.com, Inc. (ADR) (NASDAQ:BIDU)
Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is the leading web property in China. As Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) have both been banned from the country, it is likely that Baidu will be the primary mobile software provider in the Chinese market. That being the case, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) offers both search and social networking services through its mobile products. The difficulty in mobile that Baidu may be experiencing is in the quality of the phones.
After all, to access the internet with reasonable speeds and enough connectivity would require the use of a smart phone which is something that the average Chinese consumer cannot afford. Apple will be coming into the market offering Apple Inc. (NASDAQ:AAPL) iPhone’s at a price that consumers can afford, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) would be a direct beneficiary.
The importance of Apple to Baidu is unquestionable as Apple’s iOS is an extremely light and fast software operating system. Even with inferior hardware specs, iOS can perform faster than other phones. This means that the iPhone would provide more value to Chinese consumers than any other smart phone manufacturer. It is also likely that Apple Inc. (NASDAQ:AAPL) would have to partner with other app developers in the Chinese market in order to bring the full benefits of the Apple product to fruition. This could be a little challenging, but I see no reason for companies to ignore the Apple eco-system of products.
Baidu should be able to sustain its growth through mobile. The company was able to report 40% growth in its revenue year-over-year, along with net income growth of 8.5% year-over-year. Baidu is a huge beneficiary of economic growth and industrialization which can be clearly illustrated by the GDP chart below.
China’s growth has been decelerating with its most recent GDP growth figure in the 7 to 8% range, according to Bloomberg. Despite the growth deceleration, China remains a compelling investment opportunity for hardware companies like Apple.
Conclusion
The Chinese investment thesis has always been strong, but with China reporting $7.3 trillion in GDP, perhaps the United States is falling behind the red dragon from the east. Nonetheless, Apple has to make an appearance in one of the fastest growing economic zones by providing products that can clear the market at a reasonable volume. Apple has to accept a lower gross margin if it wants to compete in the Chinese space, but by being able to compete, Apple will incrementally grow its net income and revenue.
The article Apple’s China Thesis: Will It Work? originally appeared on Fool.com is written by Alexander Cho.
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