The “protect and attack” of Lenovo Chairman and CEO Yang Yuanqing is about to face a big challenge in the company’s home market.
Apple’s deal with the biggest Chinese carrier China Mobile means iPhones will be much more widely available to customers. Lenovo is No. 2 in the China smartphone market behind Samsung and has been rapdily growing its sales worldwide.
Apple (Nasdaq: AAPL) and China Mobile, which has 763 million users , announced the deal after years of negotiations on Monday.
The deal came on the same day Lenovo opened a research, development, sales, and production facility for smartphones and tables in the central China city of Wuhan.
“Lenovo, which is the world’s number 1 PC company, number 2 PC + tablet company and number 3 smartphone maker, will use the facility to both accelerate growth and drive significant new innovation in smartphones and tablets,” the company declared in a statement.
The facility covers 200,000 square feet.
“Opening this state-of-the- art facility not only strengthens our in-house manufacturing capability for PC Plus products, but it also helps us drive even greater speed and efficiency, cost savings and innovation so we can continue our rapid growth in the mobile device market,” Yuanqing said. “The Wuhan facility is an important addition to our global supply chain, but this is much more than just a manufacturing facility. Byintegrating productR&D,productionandsales operationsin a single location,this sitestrengthens our core competitiveness allowingus to bring more innovative products to market even faster. We can respond more quickly to market trends, unleash even more waves of high-quality,innovative products to meet customer demand, and capture even more growth in tablets and smartphones.”
The Apple deal, however, means Lenovo, which operates its global executive headquarters in Morrisville, faces more competition for high-end device sales. In just two years, Lenovo has surged from virtually zero to 4.7 percent global market share for smartphones. Samsung is the global leader at 31.4 percent followed by Apple at 13.1 percent and Huawei at 4.8 percent. Lenovo cited those statistics in its most recent quarterly earnings report on Nov. 7.
China Mobile will sell the iPhone 5s and 5c models in its retail stores starting Jan. 17, the companies said in a statement that provided no financial terms. The phones for China Mobile’s network will also be available in Apple’s retail stores in China under the multiyear accord.
“IPhone still matters a lot for high-end customers,” Tucker Grinnan, a Hong Kong-based analyst at HSBC Holdings Plc, said by phone before the announcement. “One of the main reasons China Mobile is in the position that it is today, in terms of growing revenue at a much slower pace than its competitors, is because they have been waiting for an iPhone deal.”
Samsung led the China market in the third quarter, followed by Lenovo, China Wireless Technologies Ltd., and Huawei Technologies Co., according to Canalys, a technology research company. Other homegrown phone makers such as Xiaomi Corp. are also gaining traction.
Apple ranked fifth with 6 percent of China’s market during the third quarter, Canalys said in November.
Apple’s potential customer pool in China is limited by the cost of the iPhone, which is more than the equivalent of $700. Most buyers in China also don’t get the discounts and subsidies that customers in the U.S. enjoy.
The agreement means Apple now has access to all carriers in the world’s biggest handset market, where Samsung Electronics leads and smartphones using Google’s Android operating system dominate sales and Lenovo is second. For China Mobile, which has 763 million users, the deal may help draw high-end subscribers to its new fourth-generation network while the company faces its first annual profit decline in more than a decade.
“The China Mobile deal will significantly help Apple’s position in China,” Bryan Wang, principal analyst and country manager in China for Forrester Research, said today. “China Mobile will use the iPhone to win back some high-end subscribers who chose to defect to other carriers because of the iPhone.”
China Mobile may add 12 million new iPhone sales for Apple in 2014, Katy Huberty, an analyst with Morgan Stanley, wrote in a Dec. 16 report. The company sold 150 million all of last year.
Pre-registration for China Mobile will start Dec. 25 with pricing and availability to be announced at a later date, according to the statement. Apple declined to comment further.
China Unicom (Hong Kong) Ltd., the nation’s second-largest carrier, began offering the iPhone in November 2009 and third-ranked China Telecom Corp. followed in March 2012.
“It’s the last big gap in distribution” for the iPhone, Benedict Evans, an analyst with Enders Analysis in London, said after the announcement.
China Mobile had 62 percent of China’s total mobile subscribers at the end of October, down from 64 percent a year earlier and 67 percent at the same time in 2011, according to company data.
“Perhaps 100 million Chinese people can afford premium products such as the iPhone,” Evans of Enders Analysis wrote in an e-mail. “Important to note this isn’t quite 750 million new customers.”
Apple is seeking new users amid signs of saturation in the market for high-end handsets. Chief Executive Officer Tim Cook is under pressure to reignite growth and maintain the margins of the world’s most valuable technology company. Apple’s stock rose 3.2 percent this year through Dec. 20, compared with a 27 percent gain in the Standard & Poor’s 500 Index.
China Mobile first said it was in talks to release the iPhone in November 2007, the same year Apple began selling the device. In 2010, Wang Jianzhou, China Mobile’s chairman at the time, met Steve Jobs, Apple’s then-CEO. Discussions continued this year, with two meetings in Beijing between China Mobile Chairman Xi Guohua and Apple’s Cook.
In September, NTT Docomo Inc., Japan’s largest carrier, ended its holdout against the iPhone. Reliance Communications Ltd., India’s third-largest operator by market value, began offering iPhone contracts in November.
One hurdle to an agreement had been China Mobile’s homegrown third-generation network standard, which hasn’t been adopted by any other carriers globally, and which Apple had been reluctant to support. On Dec. 4, China Mobile was awarded a license to begin commercial 4G service using the TD-LTE network standard.
The iPhones will work on the 3G as well as the new 4G networks, the companies said today.
China Mobile had also pushed Apple for a favorable business model to offer the iPhone. Apple had to be willing to discuss “benefit sharing,” China Mobile Chief Executive Officer Li Yue said in December 2012.
China Mobile was trying to avoid the experience of China Telecom, which reported a 10 percent drop in net income in its first year of offering the device due to higher subsidies.
Even without the iPhone, China Mobile’s handset subsidies, which hit 14.2 billion yuan ($2.3 billion) in the first half, and costs for the rollout of 4G services are choking profit growth. The company this year is projected to report its first decline in annual profit since 1999, with net income to drop 2 percent to 126.1 billion yuan, according to the average of 23 analyst estimates compiled by Bloomberg.
In October, Apple forecast gross margins that missed analysts’ projections amid higher costs to introduce new devices ahead of the holiday shopping season. The company expects revenue in the quarter ending December to be $55 billion to $58 billion, its first single-digit sales increase for the holiday period since 2008.