Apple's Profit Slide Is Great News For Its Prospects In China

Apple’s profits slid 18% last quarter. Gross margins dropped from 38.44% in 2012 to 37.5% in 2013. While there are a number of reasons for this, the biggest seems to be consumer preference for lower-priced products like the iPad Mini.

While Apple investors have spanked the stock in response, in reality they should be cheering. 

After all, we’re still in the early stages of the global mobile revolution, not the end, and Apple’s high-price, high-margin business model was never going to win outside North America and Western Europe. Indeed, could not win. While Apple is Apple and will never truly go down-market to make sales, it needs to be more price competitive in price-sensitive markets. Getting bullied on price by Android, thereby pushing Apple to introduce lower-priced (and lower-margin) products, is good for Apple, however much it may spook investors in the short term.

In other words, Apple needs to be a bit more like Google with Android.

Learning From Android

And what’s the Android strategy? Make smartphones affordable for everyone, as Google chairman Eric Schmidt declared at a recent mobile conference:

Our goal with Android is to reach everyone. We’ll cross one billion Android devices in six to nine months. In a year or two, we’ll hit two billion. And the way that’s going to happen is with the debut of low-end devices from manufacturers, primarily in Asia. If low-end smartphones are inexpensive now, imagine just how inexpensive they’ll be a few years from now… A relatively inexpensive smartphone with a browser is all you need to get the world’s information. And that’s how we’re going to hit the next billion devices.

Apple seems to be learning this lesson. While it claims a whopping 80% tablet market share in China, this is always how the company begins in a market. Remember when Apple could claim 90% of the smartphone market and then 90% of the tablet market in the US? At its premium prices, those statistics have a very short shelf life.

Selling To Both Rich And Poor

Plus, it’s very possible that Apple hit the high-end Chinese consumers first, but will struggle to claim the mass market. As Tom Christian Gotschalksen suggests, emerging markets are always comprised of both mature and emerging income brackets. Apple has done well with these mature demographics. It needs help on the emerging side.

In China, Apple seems to be holding off Samsung and the other Android vendors much better than it has before, even as it keeps slipping in smartphones. Why? Credit the lower-priced iPad Mini, as Haydn Shaughnessy argues. Apple did well with more affluent Chinese consumers in smartphones but then lost its lead as the mass-market adopted Android. With tablets, Apple is able to serve both markets.

That’s smart.

Pyramid Research has modeled the effects of Apple knocking down prices in China through carrier subsidies (especially China Mobile) and lower-priced offerings like the iPad Mini. The difference between the status quo and a lower-price market strategy is stark. This is something Apple must do.

And it is. Again, investors may not like it, but Apple is playing for long-term success in emerging markets. Finally. 

Image courtesy of feiyuezhangjie/Shutterstock.