Apple Inc., China And The Dragon That Ate Its Tail

The simple fact about consumer product companies — whether they make cars, smartphones or shampoo — is that they keep having to reinvent themselves. The latest smartphone is only the latest smartphone for a few months. That fancy car you bought is only fancy for a while, before there is another new model.

Companies are constantly having to bring out new products, invent pioneering technology and enter new markets to make sure they maintain their profitability. You could liken it to a dragon that is eating its tail.

A phone designed for China’s middle classes

This is the difficulty with Apple (NASDAQ: AAPL.US). It has already been very successful, but how can it maintain its success, its profitability, and thus its share price?

Last week, Apple launched its latest flagship model, the iPhone 5S, as well as a cheaper version called the 5C. For the first time it introduced a fingerprint sensor, and the 5C was in  range of rather cool colours. The latter model seems tailor-made for the Chinese market, where I suspect it will be snapped up by the aspiring Chinese middle classes.

Is it overpriced? That is debatable — I suspect, quite simply, that Apple is trying to maintain the premium aura of the iPhone, and also maintain its margins, with some scope for price reductions.

Tim Cook may well be proved right in his prediction that Apple’s biggest market will soon be China. Apple has recently made a deal with the leading Chinese phone network China Mobile. Plus high-speed data networks are just now being built. This may be the catalyst for a smartphone boom in the Middle Kingdom.

But competition is increasing

However, at the same time, Apple is contending with increased competition and compressed margins in markets such as the US and Europe. More and more companies, from Samsung to HTC and Sony, are bringing out products that are arguably the match of anything that Apple is producing. Personally, I’d rather buy an HTC One rather than an iPhone.

That’s why I think it is unlikely that the share price will bounce — as market share is won in one market, it is lost in another. Apple had the advantage of being the first mover in the smartphone and tablet boom. But to stay ahead it really has to accelerate its innovation. In this business, the dragon keeps eating its tail. You have to run to stand still.

Apple, I suspect, will continue to be very successful, but I can’t yet see much upward momentum in its share price. I see other, cheaper shares in the stock market at the moment.

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> Prabhat owns none of the shares mentioned in this article. The Motley Fool owns shares in Apple.