John Paczkowski

Recent Posts by John Paczkowski

Analyst: In China, Apple Could Accelerate Like BMW

“We added another 800 points of distribution in China. The revenue–we have never released this number before but I will do this in this particular case–through the first half of the fiscal year that we just completed, for the six month period, our revenue from greater China was almost $1.3 billion, and this is up over 200 percent year-over-year. So we are well pleased with how the company is positioned to take advantage of the growth in greater China.”

Apple COO Tim Cook, March 2010

Apple’s prospects in China are, by the company’s own account, promising, perhaps even more so than first thought. Now, with two marquee stores open in the country, the first of 25 the company plans over the next two years, Apple is poised to exploit an untapped wellspring of demand for its products there.

Evaluating the potential breadth and depth of that demand in a note to clients Monday, Morgan Stanley analyst Katy Huberty suggested that many observers underestimate Apple’s growth story in China. She figures the company’s expanded distribution along with a fast-developing brand preference for its products among higher-income Chinese consumers are aligning to send it on a trajectory similar to that of BMW between 2005 and 2010. And there are some intriguing similarities on which to base such a thesis.

“Much like Apple, BMW faced investor skepticism when it entered the China market due to a) price points that were significantly higher than market average, b) lack of consumer credit/financing, c) limited distribution (only 20 dealers in early 2005),” Huberty writes. “But, while the average Chinese consumer is outside of BMW’s target market (average annual income equivalent to $3,700 USD; only 6 percent of the population owns a car), the high-end consumer surprised to the upside. China now accounts for 9 percent of total BMW units, 11 percent of revenue, and 17 percent of operating income in FY2010.”

Apple, of course, is about three years behind BMW in building its retail presence in China. But its current trajectory as measured by percentage of revenue and operating income from China in FY09-FY10 is similar to BMW’s in 2006-07. If Apple meets its goal of opening 25 company-owned stores by 2012, it should continue along that same trajectory. And if it does, Huberty estimates, the country will contribute $9 billion of revenue and $3 earnings-per-share in two years.

“On an incremental basis, China alone could account for nearly 20 percent of Apple’s EPS growth in FY11 and 44 percent in FY12 with Asia ex-Japan contributing 44 percent / 100 percent of EPS growth over the next two years,” she concludes. “Again, Asia ex-Japan already contributed 38 percent of operating income growth in FY10 so these assumptions aren’t heroic assuming the points of distribution and carrier partners continue to expand.The potential success of Apple’s China business as it broadens distribution provides investors with protection from any down-tick in growth in mature markets like US, Europe, Japan.”

[Image credits: Steven Millward and Morgan Stanley


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