Apple Stock (AAPL) Feels the Pressure of iPhone 5 Sales

Apple (AAPL) unveiled its iPhone 5 in China Friday and quickly sold 2 million units. These sales over the weekend almost match the entire third quarter sales for the IPhone 4S, which was 2.1 million units. However, the company’s stock still dropped by almost 4%. Apparently, Wall Street thinks iPhone sales in China should have been even higher. According to research firm Strategy Analytics, when the figures for the third quarter were tallied, China became the world’s largest market for smartphones, based on unit sales volume.

Understanding The Market in China

Understanding how to conduct business in China effectively has been a learning experience for Apple. China’s distribution system for smartphones is not the same as it is in the United States and Apple has had some bumps along the way in its efforts to understand how to match supply with demand. The company’s debut of the iPhone 4S in China wound up causing fights outside its Beijing store when Apple delayed the opening of the store, causing Apple to temporarily suspended iPhone sales in China while it tried to figure out how to manage things better.

Matthew Crabbe, Director of consulting firm Access Asia Ltd, commented on the situation: “Apple realized that punch-ups in long queues outside their stores did not go down well, even if any news is good news.” International Data Corporation (IDC) analyst T.Z. Wong said that Apple has improved its distribution network in China, but there is still work to be done.

Addressing Apple’s adjustments to China’s distribution channels, Wong said, “When they started, they had their own stores, as well as the service providers. And then they’ve had to deal with the complicated channel structure in China, so they’re still feeling their way across the river.” Apple has built more stores in efforts to better control distribution of its products, bringing its store count in China to eleven.

Sticking to Their Niche

Apple’s share of the total smartphone market in China is not their main focus, but market share of high-end phones is. While Apple has only a 4.2% share of the overall Chinese smartphone market, it has captured 42% of the high-end market. While other smartphone manufacturers fight over the bigger market at all price points, Apple’s strategy is to focus on its niche. High-end phones typically bring in bigger profits, so Apple appears focused on the right things, but only time will tell.

Apple has long understood that its strength was not in trying to be all things to all people. Apple has built a fiercely loyal following among its American customers and they are hoping that this will translate internationally. Wall Street has a habit of rewarding and punishing company’s through fluctuations in stock prices based on very short-term thinking.

Apple has a lot of work to do in China, as well as many other international markets, before anyone on Wall Street is likely to say they have their international business under control. That is probably true of many big companies, though, so if I was an Apple shareholder I wouldn’t be too concerned about a short term stock move based on a single event like the iPhone 5 debut in China.