Apple, China Mobile Could be Closer to Tie-Up

The stars may be aligning for a long-awaited deal between Apple Inc and China Mobile Ltd, the world's biggest mobile carrier, that could help the iPhone maker claw back lost ground in its most important growth market.

Apple is expected to unveil its redesigned iPhone next month and may also release a cheaper, emerging market smartphone. [ID:nL2N0GC0DH] Crucially, it also now has Qualcomm Inc chips that can operate even on China's obscure networks. At the same time, Beijing is expected to grant 4G licenses by the year-end that favor the biggest of its domestic mobile operators.

Apple has so far ducked a deal with China Mobile as this would have required a redesign inside the iPhone to work on the operator's inferior TD-SCDMA 3G technology. For its part, China Mobile has been reluctant to commit to the huge cost of marketing and subsidizing sales of the expensive iPhone.

By offering a mid-market Apple smartphone, China Mobile, which has 740 million users, could draw in more sophisticated, data-crunching subscribers to grow net profit that last year was only 15 percent higher than in 2008, when Apple opened its first store in China.

While the 4G licenses are expected to be based on TD-LTE technology, rather than the more widely-used FDD-LTE, the new Qualcomm chips can handle both systems, saving Apple from a major re-design just for the Chinese market, albeit the world's largest.

"The circumstances and the issues that were a hindrance in the past seem to be getting resolved. So I think there's a higher probability that potentially there's something in the works," said Anand Ramachandran, a telecoms analyst at Barclays in Singapore.

Apple CEO Tim Cook met China Mobile Chairman Xi Guohua in Beijing last month, his second China visit this year, prompting speculation that a deal could be edging closer.

"We are actively negotiating and both sides are keen," Xi told reporters on Thursday after announcing half-year results. "There are still some commercial and technology issues that need time to resolve," he added, without elaborating.

FALLING APPLE

Apple may be keener now to partner with China Mobile as its sales in Greater China, its second biggest market, slumped 43 percent in April-June from the previous quarter, under pressure from mid-tier domestic suppliers such as Lenovo Group Ltd, ZTE Corp, Huawei Technologies and Xiaomi Technology. The California-based firm's China smartphone market share has almost halved since last year to below 5 percent, according to industry researcher Canalys - well behind market leader Samsung Electronics.

The smaller China Unicom, which signed up with Apple in 2009, has seen annual net profits slide, largely due to the high cost of subsidizing iPhone sales - but more recently its growth has outstripped its rivals as it trims subsidies this year having already established its high-end user base. January-June net profit jumped 55 percent to 5.3 billion yuan ($866 million).

Third-ranked China Telecom Corp Ltd entered a deal with Apple last year and, like Unicom, has seen net profit fall in recent quarters due to rising handset subsidies, though it expects profitability to improve in the long term. China Unicom and Telecom do not detail handset subsidies for iPhones.

China Mobile on Thursday posted April-June net profit of 35.2 billion yuan ($5.7 billion), up 2 percent on last year and just ahead of estimates.

"Unicom has the fastest earnings momentum," said Vincent Lam, managing director of VL Asset Management Ltd, who invested in China Unicom, but not China Mobile. "It will depend on how iPhones fare in China from now on. My feeling is the iPhone may be losing popularity to some Android phones, so even if China Mobile gets an Apple deal, we will have to see how positive the impact is."

China's smartphone shipments are forecast to increase to more than 460 million by 2017, worth nearly $120 billion, from an expected 330 million, worth $80 billion, this year, according to research firm IDC.

"Tim Cook says he expects China to be the largest market for Apple after the U.S., but I don't see how that can happen if you don't have the largest operator as your partner," said Barclays' Ramachandran.

China Mobile shares, valued at around $220 billion - half of Apple's market worth - have fallen 7 percent this year, compared with declines of 8 percent at China Telecom and 1 percent at China Unicom. The broader Hang Seng Index is down 0.5 percent.

China Mobile closed Thursday up 0.18 percent at HK$84.05 in a flat market.