Apple

Apple Has a Secret Weapon to Continue Growing

The Apple logo is pictured at the company's flagship retail store in San Francisco.
The Apple logo is pictured at the company's flagship retail store in San Francisco. Robert Galbraith—Reuters

Tim Cook sounded confident as he tried to reassure disappointed investors on an earnings call earlier this week. But analysts managed to put the revered Apple CEO on the defensive.

“2013 came around, we’ve got some new products, obviously, but nothing really from our new product category,” Brian Marshall, an analyst at ISI Group, said to Cook on the call. “Do you care to comment on the innovation cycle of the company and the cadence there?”

“Are you still a growth company?” challenged Ben Reitzes, an analyst at Barclays.

Cook and Apple’s management team have one thing to be very confident of, even as investors and analysts become more comfortable putting difficult questions to them. And that one thing is: China.

China’s technology market is booming, and the country is making up an increasingly large slice of Apple’s revenue. Emerging markets now look like they’ll be the biggest new source of revenue for Apple. Sales in the Americas last quarter actually declined by 1% compared with the year-ago period. But the company’s sales in China increased by a full 29%. And with Apple’s sales in China hitting $8.8 billion last quarter, that part of the company’s sales are almost half its $20.1 billion Americas revenues.

“China is an incredibly important market to Apple,” Cook told analysts and investors on the call. “I think you can’t be in the business that we’re in and not have a reasonable China business.”

Last month Apple cut a crucial deal with a massive Chinese wireless carrier, China Mobile, which opens up a huge market for the company’s iPhone. China Mobile has 760 million subscribers — more than double the population of the U.S. and more than triple the number of U.S. users who subscribe to AT&T and Verizon Wireless combined.

While the iPhone had already been available on smaller Chinese carriers, analysts expect the deal to bring in 20 million to 30 million new iPhone users on China Mobile’s network this year. Sales through China Mobile began earlier this month and the iPhone is already experiencing a jump in sales. “We’ve been selling with China Mobile now for about a week, and last week was the best week for activations we’ve ever had in China,” said Cook.

The iPhone on China Mobile’s platform supports the carrier’s 4G network — the latest generation of high-speed mobile broadband access — which is currently available in only 16 cities, including Beijing, Shanghai and Guangzhou. But China Mobile plans to expand the network to a total of 340 cities by the end of the year, giving impetus to Chinese consumers to buy iPhone wireless service through Apple’s China Mobile deal.

China has a robust iOS and Mac developer community, and Cook said that developers in China have created over 130,000 apps on the App Store so far. Having active developers engaged with Apple’s products is likely to help create a committed consumer base.

Some analysts have roasted Cook for lack of innovation at Apple. Cook’s focus on China may be the best way to get his feet out of the fire. The country’s population of 1.3 billion and its economy’s 7% growth rate make it one of the most attractive markets for any company. Its growing middle class has shown a voracious appetite for electronic and consumer products from global companies.

Cook has been peppered with questions about Apple’s slow growth in the U.S. market, where iPhone sales have started to slow. “I think it’s great to have an aspiration to make the best products, but I think that’s in the spirit of ultimately growing at least in line with or faster than the market. And that doesn’t appear to be happening,” Toni Sacconaghi, an analyst with Sanford C. Bernstein, said on the call.

It is happening in China, was Cook’s tart answer. “One of the most important things for us in the iPhone business was to do really well in emerging markets, and we had the best quarter ever from that respect,” said Cook. “As you know, we just added China Mobile, the largest carrier there … and so I feel great about that.”

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