Brian Hall
May 20, 2012

China Embraces the Smartphone. iPhone Storms China.

Created at May 20, 2012, 3:42am PDT

iPhone is now the single most popular smartphone on the planet, a fact that is not likely to change as the iPhone is adopted by China Mobile.Apple’s iPhone, launched in 2007, has taken the world by storm, vaulting Apple from also-ran in the “PC wars” to the biggest, richest company in the world. iPhone is now the single most popular smartphone on the planet. Every iPhone is made in China. Not just the iPhone -- smartphones of various functionalities, form factors, operating systems, brands and price points are assembled, manufactured and shipped from China. However, China is increasingly a critical market for smartphones. Indeed, China, not the US nor Europe, is now the largest market for these highly "personal computers."

The global embrace of smartphones has been rapid and destabilizing. Consider the following from Technology Review, which suggests smartphones are the fastest spreading technology in history.

[In 2002] RIM shipped its first BlackBerry with phone functionality. Then-named Handspring launched its Palm OS Treo line, Microsoft shipped its Pocket PC Phone. GPRS, a mobile data technology standard became increasingly widespread. Nonetheless, four years later, in 2006, only 715,000 smartphones were sold in the US. This was less than 6% of total mobile phone sales for the country. This all changed, quickly, in early 2007 when Apple launched its iPhone.  Sales of iPhone and of Android grew rapidly. Now, more than 2/3 of all US mobile phone sales are for smartphones.

Though it took nearly a century for landline phones to reach saturation in the US. Mobile phones achieved that rate in 20 years. Smartphones achieved this feat in less than ten. Though data on various technologies are more difficult to obtain for China, adoption patterns for smartphones appears to be on an equally rapid trajectory as in the US.

In late 2011, China surpassed the US to become the world’s largest market for smartphones. While long-time market leaders in China, including Nokia, especially, but also Research in Motion (maker of the Blackberry), are faltering, iPhone and Android are taking the country by storm. More than 25 million smartphones total are sold each quarter in China, and the number is rising. China is also the world’s largest market for Android devices, where it counts for more than 25% of worldwide Android shipments.

China remains, however, a market dominated by low-end smartphones. Of course, low-end in 2012 nonetheless represents quite a technological leap.  Consider the Changhong H5018 smartphone, available for 1,000 yuan ($142 US), a critical price point in China. This smartphone, made by iPhone manufacturer Foxconn, runs on Android, has a 3.5-inch touchscreen, 650MHz processor, 3G connectivity and 3-megapixel camera.

With numerous competitors in China embracing Android and margins squeezed, some traditional low-cost handset makers such as ZTE and Huawei are now focused on moving up the market.  Nonetheless, it is the iPhone that remains the most coveted device. iPhone is offered on two of China’s carriers but not its largest, government-owned China Mobile, which has over 665 million subscribers. Of these, approximately 60 million are 3G customers.

This is expected to change soon, as the two parties are in talks to have China Mobile officially offer the device. Currently, carrier China Mobile can only support the iPhone over their relatively slow, albeit reliable 2G network,. China Mobile’s ‘flavor’ of 3G remains incompatible with the iPhone. This is also expected to change soon.

Earlier this year, mobile chip maker Qualcomm announced that its next-gen baseband chips would support TD-LTE. iPhone recently switched to Qualcomm as the exclusive supplier of such chips.  If the chips do indeed support TD-LTE and are used in the next iPhone -- reliable but still unconfirmed data points -- iPhone would then become compatible with China Mobile’s existing 3G network and the carrier’s 4G/LTE network, which it is currently testing across several large cities. That said, there have been reports of Qualcomm’s inability to deliver these baseband chips in the volumes Apple will require for its next iPhone.

These new Qualcomm chips, if implemented, will allow iPhone to run on China Mobile’s 3G network though both Apple and China Mobile understand that the value of the device is enhanced via 4G connectivity. Gaming, videos and other data-intensive services benefit from 4G.

China Mobile’s planned TD-LTE “4G” network should deliver speeds of 10-20 times faster than their current offering and for less cost.  TD-LTE means "time division long-term evolution." It is a network technology that supports more voice connections, faster data speeds and easier network upgrades. China Mobile’s TD-LTE differs from the more common FDD-LTE, or Frequency Division Duplex-Long Term Evolution network infrastructure. FDD-LTE, for example, is used by Verizon Wireless. A major difference  is that TD-LTE uses a single frequency instead of paired spectrum. This is useful during times of scarce spectrum. In addition, TD-LTE is potentially more suited for wider-scale deployments. 
China Mobile’s TD-LTE (‘4G’) network for Shenzhen is expected to be completed this year. The carrier has completed initial testing of the network in six cities, with plans to deploy 4G in various cities between 2012-2014. Some analysts, however, believe 2014 is the earliest date for China Mobile’s 4G network to be deployed on a wider level.

While China Mobile hopes to capture more customers, and reduce churn, by offering the iPhone, financial analysis site, Trefis, expects Apple iPhone sales to get a sizable boost from  a partnership with China Mobile:Qualcomm's newest Gobi platform will allow the iPhone to work on China Mobile's networks.

Qualcomm announced the launch of its fifth-generation Gobi platform that would “support multiple LTE bands on a single device.” This means that the iPhone 5, which is very likely to have LTE capabilities, can support both the under-trial 4G network as well as the so far incompatible 3G network that China Mobile runs. The availability of a subsidized iPhone on China Mobile’s network will be a huge opportunity for Apple to gain a strong foothold in the Chinese market.

As the technological barriers are falling, a partnership between China Mobile and Apple becomes more of a certainty. Per Reuters:

China Mobile, the world's biggest telecom carrier by subscribers, said on Wednesday [16 May 2012] it is negotiating with Apple Inc to carry the popular iPhone in China. China Mobile is the only Chinese operator that does not officially carry the iPhone because its homegrown 3G technology is not supported by the chips used in current iPhone models. 

"We've been actively talking to Apple on how we can cooperate," (said) China Mobile Chairman, Xi Guohua.

China is already Apple’s second largest iPhone market. In the first quarter, 2012, Apple sold 5 million iPhones in China and an additional 3 million in Hong Kong. CEO Tim Cook has repeatedly stated that China is a strategic focus of the company.  The technological issues preventing iPhone from working on China Mobiles 3G and planned 4G networks, are likely to be resolved soon. New baseband chips are enabling not only iPhone but any smartphone to run on nearly any carrier network anywhere in the world. The spread of smartphones will likely progress even faster.