Capital Market Laboratories

PREFACE
The market has turned away from Apple and focused on Amazon.com (NASDAQ:AMZN) and Facebook (NASDAQ:FB) as the two “new Apple’s.” But Apple is making news again, this time in Facebook’s second largest market. While supply side news stunned Wall Street showing stronger demand for the iPhone 7 than anyone anticpated, we just caught wind of two other pieces of news: one is great news, the other could be catastrophic. Furst, the good, then the bad.

GREAT NEWS
Apple Inc. (NASDAQ:AAPL) is going after India, the country that represents the second largest smartphone market in the world, behind China. We have written about it ad nauseum, but the major point here is that Apple has essentially no footprint in the country, taking home as little as 1% of the smartphone market share, and all of a sudden, everything changed.

If you recall that that 1%-2% market share we looked at in India as of mid-2015, news from Quartz broke in March that the tide is shifting, and it’s building into a tsunami:


That number has spiked to 5.8% in tier-I Indian cities.

The key for Apple Inc. was to get around India’s law that requires 30% domestic sourcing of products sold in India. First, it looked like Apple had a huge win by side stepping the requirement. A tectonic shift began last year with a visit by Apple’s CEO Tim Cook and a private meeting with India’s Prime Minister. While the meeting was rather private, the results were not:

Shortly after the meeting we got this news: India has singled out “cutting-edge technology” as a segment that can side-step the 30% local producer rule and Apple has been singled out as “cutting-edge technology.” What a coincidence.

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Then Tim Cook went to India just a few weeks ago things went spectacularly well, with news of Apple Inc. (NASDAQ:AAPL) stores coming to the country, an R&D facility, and just a lot of smiles. But, as Prime Minister Modi shook Tim Cook’s hand, the country’s finance minister kicked him in the shins, reportedly denying a waiver of that 30% sourcing rule. That news was stunning.

Alas, the good news came right back, with this:


That’s the great news. But, Apple Inc. also just received catastrophic news too, from a totally different place.

CATASTROPHIC NEWS
China makes up more than 50% of Apple Inc. (NASDAQ:AAPL) operating income, but the company has met fierce new competition. Tim Cook has calmed fears of that competition, noting several facts about Apple’s brand acceptance in China. But what nobody expected was for China’s homegrown smartphone companies to come to the United States. And friends, that is going to happen.


So Microsoft Corporation (NASDAQ:MSFT) has made a brilliant move to strengthen its footprint in China, while simultaneously allowing Xiaomi to take aim at Apple in the United States. Xiamoi runs Alphabet’s (GOOGL) Android OS.

People have called the new launch of the Xiaomi Mi 5, a $400 phone, “the iPhone killer” in China with twice the battery, 10 percent less weight, a more powerful processor than the Apple’s A9, and a better camera (Breitbart).

Xiaomi’s cheaper phone wasn’t a global iPhone killer because the domestic Chinese have never had the patent rights to begin forming alliances with telecommunications firms in the U.S. and Europe. That barrier has been smashed down and that’s catastrophic news for Apple. Or is it?

GOOD NEWS VERSUS BAD NEWS
While the bearish view of this outcome is pretty obvious, it turns out this could be a non-issue. No matter how we slice it, “Sino phobia” (a sentiment against China, or Chinese culture) is as real as ever. The public Chinese companies that trade on U.S. exchanges have been hounded by fraud allegations from the smallest companies all the way to the largest of them all, Alibaba (NASDAQ:BABA).

The U.S. consumer is no different and there is very little evidence that even if Xiomi makes it to the U.S. that anyone will be interested.

On the other hand, the news in India is tremendously good. Bears will argue that India’s consumer can’t afford an iPhone, which is true for the most part, but Apple isn’t after “the most part,” it’s after 20% of the market, like it has in China. Is there more to this story? Yes, there’s a lot.

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Thanks for reading, friends. The author is long Apple shares in his personal account.