The Chinese government wants to nip the trend of smartphone subsidies in its bud

In the previous part of this series, we discussed how Apple (AAPL) has started to take baby steps in cutting down the prices for older iPhone models such as the iPhone 4S. We also discussed how, although the smartphone subsidy model is quite prevalent in developed markets, it hasn’t quite picked up in emerging markets as of yet. Early this year, China’s telecom providers, China Mobile (CHL), China Unicom (CHU), and China Telecom (CHA), had started to sell the iPhone 5S at a subsidized price. However, it seems the Chinese government wants to nip this trend in the bud itself.

According to a report from AppleInsider citing UBS analyst Steven Milunovich as the source, China’s government has asked Chinese telecom providers to cut their marketing costs by 20%, which will include a cut on smartphone subsidies. If this happens, then it would affect Apple the most, as it depends highly on subsidies to grow its iPhone sales. Although iPhones sell at a premium in China, they still dominate China’s high-end smartphone market. According to a report from Umeng, China’s largest analytics firm, and as the chart below shows, in 2013, 27% of China’s smartphones sold for over $500, and 80% of those were iPhones. This contradicts the popular belief that Samsung (SSNLF) is eating into Apple’s share in the high-end Chinese smartphone market.

Why Chinese carriers cutting smartphone subsidies affects Apple

Why selling subsidized iPhones is so important for Apple

According to the chart above, only 27% of smartphones in China sell at a $500+ price point, which is also the price point of the iPhone without a subsidy. However, to tap the remaining 73% of the smartphone market, Apple will need the support of the subsidy. China is an important market for Apple, and according to Apple’s latest filings, the company generates more than 15% of its revenue from the Greater China Area. However, if Chinese regulators interfere with the subsidy model in China, this could mean that Apple would be unable to reach the majority of income groups in China, which could result in a major impact on its sales.

To learn more about investing in Apple, see the Market Realist series Apple’s entry into new markets could maintain its stock momentum.

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