Massive China market offers even more upside for Apple

71% increase in Q1 revenue relied on iPhone, but the halo effect in the PRC has yet to be fully exploited, say analysts

apple store pudong china

Although Apple announced record revenue from its Greater China sales region this week, the company's strategy has enough legs to push the market into the No. 1 spot on its books, analysts said today.

"It may take a couple of years, but China can become Apple's biggest," said Jan Dawson, chief analyst with Jackdaw Research.

The Americas, dominated by the U.S., remained Apple's largest sales region in the March quarter, generating $21.3 billion or 37% of the $58 billion total. But Greater China -- composed of the People's Republic, Taiwan and Hong Kong -- came in second with $16.8 billion, or 29%, supplanting the usual No. 2, Europe, for the first time.

Revenue from China surged 71% compared to the same quarter the year before, fueled by impressive iPhone sales.

CEO Tim Cook credited the iPhone for China's growth, saying that iPhone sales there were up more than 70%. Analysts, including Ben Bajarin of Creative Strategies, citing their data, confirmed that Apple sold more iPhones in Greater China than in the Americas, a first.

Later, Apple CFO Luca Maestri said that the Cupertino, Calif. company had sold more iPhones in China than in the U.S. during a post-earnings interview with Bloomberg on Monday. Apple does not break out device sales by country or market, however, and Maestri declined to detail the numbers to Bloomberg.

Apple's success in China confirmed what analysts had anticipated: that the introduction last fall of the larger iPhones, particularly the 5.5-in. iPhone 6 Plus, would be hits in Asia, where larger smartphones have a much stronger track record than in the U.S.

"The question was always about how well Apple could do in China," said Patrick Moorhead, principal analyst with Moor Insights & Strategy. "What's clear is that Apple can knock it out of the park there without taking price cuts. Their model works best when there are good, better and best choices. If you can get to best, you have a pretty good shot at making the model work."

"It's hard to look past the iPhone," added Dawson, of interpreting Apple's earnings. "And China and Asia were the key components to that."

Dawson pointed out that Apple's "Rest of Asia Pacific," the sales region that omits Greater China and Japan, also boosted its revenue to the tune of a 48% increase to $4.2 billion, or 7% of the total. Together, Greater China and the Rest of Asia Pacific produced $21 billion, almost as much as the Americas.

"The larger phones Apple launched [last year] are a great fit for a region where large smartphones are far more popular than tablets, and where domestic Asian brands had mopped up much of the opportunity," Dawson wrote on his Jackdaw blog.

"China is where Apple's growth is now, and obviously the focus," said Dawson in an interview. And that growth has room to, well, grow even more.

Unlike more mature markets, especially the U.S., Apple in China lacks a broad-based retail infrastructure of its own, and sales of non-iPhone products and services, including the iPad and Mac, are significantly smaller.

Apple has just 21 stores in Greater China at this point, less than 8% of the number in the U.S.. But it plans to nearly double that number by mid-2016.

The dominance of the iPhone within Apple's portfolio in China gives the company room to boost sales even more, Dawson and Moorhead asserted. While the "halo effect" of the iPhone in the U.S. is strong -- iPhone sales trigger purchases of Macs, iPads and Apple services -- there's a much weaker connection between the lines in China.

"Retail presence is critical" to encouraging the halo, said Dawson.

Apple provided some information Monday about sales of non-iPhone products in the region that signaled improvements. Cook said that Mac sales in Greater China were up 31%, triple that of the global increase for the quarter, and iPad sales there were a record. Cook also said 70% of iPad buyers in China were first-timers to the tablet, nearly double the 40% in the U.S., as he spun the device's poor performance, now in its fifth quarter of declining sales.

While both Dawson and Moorhead highlighted Cook's statistics as pointers about Apple's future opportunity in China, each also labeled the Apple Watch as the likeliest next-big-thing there.

"The growth [in China] is driven largely by the iPhone, but what other products can contribute?" Dawson asked, then tapped the Watch as the answer. "What will be worth watching is the Watch launch," he said. "It could start making contributions in the next few quarters."

Not surprisingly, there are risks in banking on China.

Western technology companies in general face an increasingly hostile environment there, what with the PRC's protectionist moves, said Moorhead. But Apple is insulated more than most because others rely heavily on sales to government agencies and businesses, which are being forced or pressured to shift to domestic vendors.

"Apple is a consumer play, it's not in the back offices of enterprise, military and the government," said Moorhead.

Copyright © 2015 IDG Communications, Inc.

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