By Daisuke Wakabayashi, Lorraine Luk, Ian Sherr and Paul Mozur
Apple Inc. is preparing to ship iPhones to China Mobile Ltd. , people familiar with the matter say, an arrangement that would significantly increase Apple’s distribution in the world’s biggest smartphone market.
A deal would cap years of negotiations between the two companies. Apple has tried to hammer out an agreement with China’s largest wireless carrier that has 700 million subscribers, seven times the size of the U.S.’s largest carrier Verizon Wireless. Greater China is Apple’s third biggest market after the U.S. and Europe in terms of sales.
On Tuesday, Apple will hold an event at its Cupertino, Calif. headquarters, where it is expected to unveil two new iPhones. People familiar with the matter have said Apple is shipping a new high-end model and a cheaper version this month.
Apple has asked Foxconn, its contract manufacturing partner, to add China Mobile to the list of carriers slated to receive a new low-cost iPhone, one of these people said. It isn’t clear if the two sides have signed an official agreement or when the phones would be delivered.
The decision to offer a cheaper iPhone to China Mobile, one of the world’s last major operators that doesn’t carry Apple’s smartphones, comes at a critical moment for Apple. The iPhone, Apple’s best-selling product, is losing share to competitors including Samsung Electronics Co. and Apple is wrestling with the perception the company is starting to lose its innovative touch.
Apple’s sales in Greater China fell 14% from a year earlier to $4.6 billion during its fiscal third quarter ended June 29. In the June quarter, Apple’s China market share fell to 5%, ranking it seventh behind market leader Samsung, which had 18%, and a cluster of domestic manufacturers such as Lenovo Group Ltd. and Huawei Technologies Co., according to data from research firm Canalys.
China represents a significant growth opportunity for Apple, a comment Chief Executive Tim Cook made in April citing the large number of potential first-time smartphone buyers there. At the time, Apple has also pledged to double the 11 stores it has there in less than two years.
Overall smartphone shipments in China are estimated to rise 84% to 352 million units this year, or more than double that of the U.S., before increasing to 421 million units in 2015, according to research firm Canalys. China overtook the U.S. as the world’s biggest smartphone market last year, making it all the more important for Apple to have more access to that market.
Apple was initially reluctant to bring its iPhone to China Mobile’s unique and relatively unreliable third-generation network that slowed download speeds and made producing phones for the carrier more expensive, according to a person familiar with Apple’s thinking. Meanwhile, China Mobile bristled at Apple’s insistence on sales volume guarantees, a person familiar with the talks said.
Another issue that has hampered Apple’s success in the country has been the phone’s price, which is considered expensive for a majority of consumers, particularly when compared with domestic brands offering a product with similar technical specifications at a fraction of the price. Whereas U.S. carriers provide subsidies to lower the upfront costs of purchasing an iPhone, Chinese carriers’ subsidies kick in later as refunds that can lower monthly phone bills. This does little to ease the initial outlay for a new phone.
But the two companies are now in a position where they need each other.
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(Published September 6, 2013 in The Wall Street Journal.)