‘Expensive’ smartphone brands like Samsung have always got a subsidy in China from the major carriers, which played a crucial role in these companies gaining significant market share, even Apple Inc. (NASDAQ:AAPL) managed to convince Chinese carriers and get subsidies on its phones around six months ago. But with China Mobile, the nation’s biggest carrier, announcing a cut in subsidies, all that is about to change. China Mobile was facing pressure from investors for a long time to improve its profitability by reducing these subsidies and recently authorities from the Chinese government have also asked China’s three mobile carriers to reduce their costs by cutting these subsidies.
Crid Yu, Former Executive at Google China, and Paul Kedrosky, Contributing Editor at Bloomberg, discussed the cut in subsidies by China Mobile and how it is going to affect players like Apple Inc. (NASDAQ:AAPL) on Bloomberg, recently.
“[…] Something like 50-60% of the phones sold in the Chinese market are sold with the subsidy and that mostly goes obviously towards the most expensive phones of which Samsung and Apple Inc. (NASDAQ:AAPL) make a disproportionate share, but on the other hand, you know, one of the issue is they are selling to very affluent customers, so, I think, it’s untested how much of a difference subsidy reduction is going to make when you are always selling an expensive phone to an affluent customer in China. So, I think, it will have some difference, I am just not convinced it will be as dramatic as some people are making it out to be,” Kedrosky said.
Yu revealed that Local Chinese brands like Xiomi and Lenovo have crossed Samsung in sales by a wide margin and Samsung has been reduced to no. 5 player in the Chinese smartphone market. Apple Inc. (NASDAQ:AAPL) had lobbied for subsidies on its smartphones for a long time and had started receiving them just six months ago. According to Kerdosky, China Mobile wants a good relationship with Apple Inc. (NASDAQ:AAPL) and this subsidy cut mostly won’t affect affluent customers who buy Apple Inc. (NASDAQ:AAPL)’s devices, but it will benefit the low-end customer.
“[…] The good news for Apple Inc. (NASDAQ:AAPL) is that they are not even in the top five so they are really a niche player in China, so, I agree they will see probably some downside effect, but not too much […],” Yu said.