George Leong writes: When the next-generation Apple Inc. (NASDAQ/AAPL) “iPhone 5S” and “iPhone 5C” were launched in mid-September, the company reported record sales over its first weekend of selling.

But there was a problem: the majority of the sales were for the iPhone 5S, while sales of the iPhone 5C lagged. The problem was the cost of the plastic-cased 5C; at around $100.00 with a two-year contract, the “cheaper” version simply cost too much, especially for the emerging markets like China, where Apple had high hopes for the iPhone 5C.

Obviously, the initial demand for the iPhone 5C over the first few weeks appears to be disappointing. Best Buy Co., Inc. (NYSE/BBY) announced it was cutting the price of the 5C to $50.00 on a two-year contract between October 3 and October 7.

But while the discount was only for four days, you kind of wonder if there will be a more permanent price cut ordered by Apple should sales lag.

The iPhone 5S is selling very well, but for Apple to really break out of its shell, the company will need to cut the cost of the iPhone 5C in order to get a foothold in the emerging markets.

Without a major price cut, it will not be easy for Apple to break into a mobile market that focuses on attractively priced smartphones—a market that includes established rivals, such as Nokia Corporation (NYSE/NOK), whose mobile assets are to be acquired by Microsoft Corporation (NASDAQ/MSFT), Samsung Electronics Company Ltd., LG Corporation, and major upstarts, such as Huawei Technologies Co. Ltd. and ZTE Corporation, based out of China.

For Apple, the massive mobile market in China is what the company desperately aims to grow. The company’s current market share in China is insignificant and lags behind both the domestic and foreign makers.

So far, an official distribution deal with China Mobile Limited (NYSE/CHL), the largest cell phone operator in China with 500 million-plus users, has yet to materialize and this is worrisome. Apple needs China, especially a deal with China Mobile.

Until Apple can make some ground in China and other massive cell phone sectors in the emerging markets, such as India, Asia, and Latin America, the company will only be regarded as tops domestically. With the U.S. mobile market being only a small fraction of the global market, Apple will need international success.

In my view, I would be hesitant to buy Apple now unless there are developments in China. One contrarian play in the smartphone market to consider might be Microsoft, if its deal to buy the mobile assets of Nokia is approved. (Read “Why I Like Microsoft’s Proposed Acquisition of Nokia’s Cell Phone Business.”)

Source: http://www.profitconfidential.com/stock-market/update-apples-attempt-to-enter-emerging-markets-a-blunder/

George Leong, B.Comm.

http://www.profitconfidential.com

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