Does Apple’s Growing Dependence on China Make It Vulnerable?

Apple seems able to do no wrong. In its most recent fiscal quarter, the giant consumer electronics maker posted a 59% increase in sales and a whopping 94% rise in profits. Such stellar numbers disguise the possibility that Apple’s near future may not be so prosperous, particularly if it falters in China.

Apple’s steady climb in sales and profits has fueled a 435% rise in its stock price over the last five years - making it the most valuable nongovernmental public company in the world. While happy to reap the benefits, shareholders are also skittish over when the good times will end. No business can continue to soar forever.

During the two weeks leading up to the earnings report, Apple’s stock fell five days straight over fears that iPhone sales would weaken if mobile phone carriers started cutting subsidies to improve margins. While the earnings report calmed nerves for now, investors are still hypersensitive to any signs that Apple might be losing steam.

China Mobile Is the Key

The best indicators of Apple’s future are likely to be seen in China, where the company is trying to strike a deal with the country’s largest carrier, China Mobile. Apple already has deals with the much smaller China Telecom and China Unicom to sell the iPhone in what has become the world’s largest mobile phone market – with 1 billion subscribers.

So how important is China Mobile to Apple? “Apple needs the partnership in order for them to continue to expand their share there,” says Crawford Del Prete, analyst for market researcher IDC.

China is stoking growth in the Asia-Pacific region, which accounted for 26% of Apple’s $39.2 billion in sales in the first quarter of this year. Nearly all revenue from the region is from the iPhone, which accounted for 60% of Apple’s revenue in the quarter. If these growth rates continue, Asia Pacific will soon surpass Apple’s biggest market, the Americas.

Without China Mobile, Apple could find it difficult to keep sales rising fast enough to satisfy investors, based on the latest projections from Forrester Research. Adding the carrier would raise Apple’s share of the smartphone market to between 15% and 20% by 2014. That amounts to 40 million iPhones, or more than a quarter of Apple’s overall annual iPhone shipments today, according to Forrester analyst Bryan Wang in China. In the first 12 months, China Mobile would be expected to add 10 to 15 million new iPhone subscribers.

Is China Mobile Enough?

Even with China Mobile, though, Apple faces hurdles. Competition in China is fierce, and Apple will be fighting against less-expensive Android smartphones from Huawei and ZTE, and new models from Nokia, which is using the Windows Phone platform in a partnership with Microsoft.

That price differential is a huge problem for Apple in China. The premium-priced iPhone is truly affordable only to high-wage earners in China’s top 20 cities. To move into the Chinese broader market, Apple would have to sell versions of the smartphone that cost much less than the iPhone’s current starting price of almost $800, which is more than a month’s wages for many Chinese. “That is actually way beyond what the average Chinese can spend on a cellular phone,” Wang noted.

In China, carriers typically require people to pay for the phone up front (any subsidies are credited over the life of the contract), which is why the best-selling smartphones in China sell for around $150.

Of course, disappointing iPhone sales could be offset by the iPad. Wang expects that Apple’s tablets will sell very well as replacements for netbooks, the inexpensive mini-laptops that are still popular in emerging markets. They could even top iPhone sales.

However, for that to happen, Apple must win its legal battle over Chinese rights to the iPad brand. Proview Technology Shenzhen Co., the mainland China arm of Hong Kong-based Proview International Holdings Ltd., claims to own the name and is suing Apple.

In a country lacking a truly independent judiciary, it’s difficult to guess Apple’s chances of winning.