Despite disappointing China debut, iPhone's 2010 predicted to be strong

In a note to investors Tuesday, analyst Gene Munster with Piper Jaffray said that though the launch of the iPhone in China was "soft," the slow start has not caused him to adjust his projection of 9.2 million iPhone sales in the December quarter.

Munster believed that China would contribute 1 million or 2 million iPhones in total global sales for 2010. But at a sales rate of about 1,500 per day over the first four days in China, Apple would sell only 550,000 phones in its first year, if the pace is maintained.

Still, with a number of other catalysts for the iPhone on the horizon, including expansion to multiple carriers, the analyst said Tuesday he has maintained his projection of 36 million phones sold in 2010.

"We believe the news following the China launch removes one of several wild cards for potential iPhone unit upside in the Dec. quarter," Munster said. "The other major drivers of potential upside include: several launches on new carriers in the UK (1 carrier Nov-09) and Canada (2 carriers Nov-09), pent up demand worldwide given iPhone availability in the Sept. quarter was constrained, as well as the wild card of holiday gift-giving in the U.S."

The iPhone's slow start in China was attributed to a combination of relatively high prices for non-contract handsets, as well as widespread availability of iPhones on China's gray market. The official iPhone through carrier China Unicom does not have Wi-Fi due to government regulation, while less expensive unofficial options do have Wi-Fi.

iSuppli Corp. noted Tuesday that China has a projected 145 million cell phone gray market for 2009, up 43.6 percent from the 101 million in 2008. China's unofficial cell phone market accounts for an estimated 12.9 percent of the 1.13 billion global phone users, and has quadrupled from 37 million in 2005.

"Because of its under-the-table status, China's gray market has been difficult to size up," said Kevin Wang, director, China Research, for iSuppli. "However, with its vast size, growing competitive presence and increasing influence on the global supply chain, this market now must be reckoned with."

While the unofficial market in China continues to grow, overall cell phone shipments are predicted to decline by 8 percent in 2009. By 2013, China's gray market is projected to be 176 million units at an 11.7 percent compound annual growth rate, while the legitimate cell phone market will increase 4.4 percent in the same frame.

Munster said he believes that the disappointing China launch is reminiscent of the iPhone's U.S. debut with AT&T, when 146,000 phones were activated in its first two days. At the time, he said, it caused unfounded concerns about the long-term potential of the iPhone.

He also noted that China is just one player in a large global market. Last month, Apple reportedly increased parts orders for the iPhone by 20 percent in anticipation of the upcoming holiday season. Sales of the iPhone were restricted during the September quarter as Apple struggled to meet global demand for its phone. Despite those issues, Apple still managed to sell a record 7.4 million iPhones.

Apple executive Tim Cook said during the company's quarterly conference call that supply issues were addressed by the end of September and early October.

"I feel good about how we're positioned now," Cook said.