Apple Inc. (NASDAQ:AAPL), the company behind the iPhone devices and whose shares are up more than 22% this year, may be in for a serious challenge in China as partner China Mobile moves to slash subsidies on smartphones. The same move may also impact Samsung Electronics, whose devices are also doing well in China because of carrier subsidies. On Bloomberg, David Ingles discussed the development on “On The Move Asia” and its possible impact on the Chinese carriers.
Apple Inc. (NASDAQ:AAPL) is in an iPhone offering deal with China Mobile, the world’s largest carrier whose subscribers are said to be in the neighborhood of 800 million. The arrangement between Apple and China mobile was expected to support Apple’s penetration into the Chinese smartphone market.
The state-owned China Mobile announced $2 billion reduction in device subsidies, which takes effect this year. The move has the potential of raising the cost of Apple Inc. (NASDAQ:AAPL)’s iPhones as well as those made by Samsung in China.
“[…] The so-called subsidies, you know, a lot of telcos [telecommunication companies]do this anyway. You partner with a smartphone manufacturer then you get the customers to sign the contract,” said Ingles.
He said that subsidies allow customers to get hold of premier devices, such as Apple Inc. (NASDAQ:AAPL)’s iPhone 5C and 5S, at a fairly good deal. However, Ingles pointed out that regulators in China are changing the rules of the game. He also said that regulators have asked telecommunication companies in China to trim their spending on advertising and marketing, which is why China Mobile announced the $2 billion cut from its device subsidy budget.
“Initially the budget was $5.5 billion, that now has been brought down to $3.4 billion, of which $2.5 billion was already used up in the first half […],” Ingles said.
Ingles further pointed out that besides the fact that reduction in device subsidy will affect the sale of device manufacturers such as Apple Inc. (NASDAQ:AAPL) and Samsung, China Mobile itself will face a growth challenge, which he said the company may have to look to the global market. In fact, he said that has been their dream.
“They are looking for acquisitions, actively. It has always been their dream, they say, for China Mobile to grow abroad. So they are looking at acquisitions there […],” observed Ingles.