Apple Inc. is striking gold in an unlikely place: Japan.
In the past two years, Japan has emerged as Apple's fastest-growing region, far outpacing its home market and the booming economies of Greater China and the rest of Asia. Japan is also home to Apple's biggest profit margins, and the only one of Apple's five regions where operating profit grew in the past fiscal year.
That is surprising because Japan isn't most companies' idea of a growth market. It has labored through two decades of economic malaise, and is saddled with a shrinking, aging population. Moreover, domestic firms that pride themselves on consumer electronics have kept foreign competitors at bay for decades.
The iPhone has propelled Apple's success in Japan, supported by heavy marketing and rich subsidies from telephone companies. The iPhone's cachet taps Japan's fervor for brand-name goods, similar to how Japanese shoppers once flocked to Louis Vuitton bags and Burberry scarves.
"Apple's brand is just overwhelming here," said Eiji Mori, a Tokyo-based analyst at BCN Inc. "It's not about specifications. It's not about rationale. It's about owning an iPhone."
Sales got another boost in late September when NTT DoCoMo Inc., Japan's largest wireless carrier, began offering the iPhone for the first time to its 61.8 million customers. Even before that, the iPhone was Japan's best-selling smartphone, with a 37% market share in the six months ended Sept. 30, according to Tokyo's MM Research Institute. That's comparable to the iPhone's 36% share in the U.S. in the third quarter, according to Kantar Worldpanel ComTech.
Apple's iPad also garnered more than 50% of Japan's tablet-computer market in the fiscal year ended March 2013, said MM Research.
As the last major Japanese operator to offer the iPhone, DoCoMo is aggressively discounting new models to lure users from competitors, while offering incentives to entice existing subscribers to switch from other phones.
"I had a (Sharp) Aquos feature phone, but I wanted to try out the iPhone once," said Mika Kasai, 36, as she chose an iPhone at a DoCoMo shop in Tokyo last week. Ms. Kasai considered buying a Sony Corp. smartphone, but opted for a gold iPhone 5S despite a four-week wait.
DoCoMo's entry into the market has prompted KDDI Corp. and SoftBank Corp., Japan's second- and third-largest carriers respectively, to counter with iPhone discounts of their own. All three companies now offer the standard iPhone 5S at no upfront cost to consumers.
Timothy Arcuri, a managing director at Cowen & Co., estimates that Apple will sell 11 to 12 million iPhones in Japan in 2013, roughly double from an estimated five to six million in 2012. He expects that number to grow to about 20 million iPhones next year. World-wide, he expects iPhone sales to increase 16% this year and 10% next year.
"They're going to be close to 50% market share next year" in Japan, said Mr. Arcuri.
According to Strategy Analytics, Japan was the world's fourth-largest smartphone market in the first quarter of 2013, ranking behind China, the U.S. and India. As of the end of September, there were 50.15 million smartphone subscribers in Japan, said MM Research.
Two factors in the iPhone's Japanese success are Japan's wealth and the degree to which its phone market resembles the U.S., a "postpaid" market where the phones are subsidized by carriers and sold with multiyear contracts. "The U.S. and Japan are unique in that sense," says Sanford C. Bernstein & Co. analyst Toni Sacconaghi.
In markets where most consumers pay for the handset upfront, the iPhone's big price tag damps sales.
In China, the world's largest smartphone market,Apple's newest phones, the iPhone 5C and 5S, are roughly twice as expensive than what most consumers pay for a homegrown alternative with a larger screen. Research firm Canalys said Apple ranked fifth in China's smartphone market in the most recent quarter.
Apple could get a lift if China Mobile Ltd., the country's largest carrier, starts to roll out iPhones on its network. The Wall Street Journal had reported in September that the company was preparing to ship the handsets to the operator.
In India, where about two-thirds of smartphones sell for less than $200, Apple's smartphone market share is less than 5%, according to research firm IDC. Reliance Communications Ltd., the country's number-three carrier, said this month that it will be the first operator to offer a subsidized iPhone with a two-year contract.
One unique factor in Japan is the relatively small presence of Samsung Electronics Co., the world's largest smartphone maker. Samsung ranks fourth in Japan behind Apple, Sony and Sharp Corp., in part because of a Japanese consumer bias that works against many Korean brands.
Apple also is benefiting from the struggles of Japan's electronics conglomerates. NEC Corp. pulled the plug on its smartphone business earlier this year, while Panasonic said in September that it plans to stop producing smartphones for mainstream consumers.
Apple's sales in Japan grew 27% to $13.5 billion in the fiscal year ended Sept. 28, compared with increases of 12.8% and 4.1% in China and the rest of Asia Pacific, respectively. Revenue growth was hampered by a weaker yen that diminishes sales when converted into U.S. dollars. In the preceding fiscal year, Japan outpaced the other regions with a 94% increase in sales.
Japan is also the most profitable market for Apple with operating profit margins exceeding 50%, compared with 35% in the rest of the world.
Article Source: Apple finds surprising growth market in Japan