Apple (AAPL) finally has a deal with the world’s largest cellular operator in the world’s largest mobile-phone market. After almost six years of false starts, the company and China Mobile (CHL) announced yesterday they had signed an agreement to make the iPhone 5S and Phone 5C available to the 760 million customers of the Chinese state-owned operator.
Coming just a few months after a similar breakthrough with the leading carrier in Japan, NTT Docomo (9437:JP), the China Mobile deal addresses Apple’s traditional weakness in Asia. What it won’t do, however, is propel Apple to the top of the Chinese market. Samsung Electronics (005930:KS) is No. 1 now, followed by Lenovo (992:HK) and other local makers that sell good smartphones for far less than the cost of an iPhone. “Chinese consumers like to buy low-end, so-called white box, low-priced mobile phones,” Barclays analyst Kirk Yang told Bloomberg Television.
The deal doesn’t solve all of China Mobile’s problems, either. The company’s stock price barely moved today, and since the Wall Street Journal first reported in early December that a deal was imminent, China Mobile’s Hong Kong-traded shares have dropped 4.3 percent. China Mobile watchers have good reason to be wary. The company is on track for a 2 percent drop in net income this year, according to the average of 23 analyst estimates compiled by Bloomberg—the first decline since 1999. China Mobile has suffered in part because, unlike its competitors China Unicom (CHU) and China Telecom (CHA), it has to use a 3G network that runs on a locally developed standard.
China Mobile is betting it will be able to turn things around in 2014. The breakthrough with Apple came about just after the government ended several years of anticipation by licensing China Mobile and its two rivals to introduce LTE networks. China Mobile has invested heavily in the new technology, with almost $6.9 billion budgeted this year for its 4G network and nearly 200,000 base stations. Since 2011, China Mobile has put together what is “almost certainly the largest trial network in the history of mobile communications,” Andrew Haskins, an analyst with Hong Kong research firm Forensic Asia, wrote in a report published Dec. 10.
That puts China Mobile well ahead of its rivals, and the company should be able quickly to convert its “trial” network to a full-fledged commercial one. But that’s not enough for China Mobile, according to Haskins. The permission to launch TD-LTE “may seem like a victory for China Mobile, which has lost ground heavily in 3G,” he writes. “But [the] 4G launch comes too late to hurt China Telecom and China Unicom, whose competitive position has recently greatly improved.” The smaller companies have better 3G networks and so don’t have the same need to rush into 4G. China Mobile, which still doesn’t make money on its 3G network, will need about four years before it breaks even on its new network, he argues. According to Forensic Asia, China Mobile’s earnings “will stagnate while its rivals’ profits will grow.”