Apple Inc. is preparing to ship iPhones to China Mobile Ltd., people familiar with the matter say, an arrangement that would significantly increase Apple's distribution in the world's biggest smartphone market.
A deal would cap years of negotiations between the two companies. Apple has tried to hammer out an agreement with China's largest wireless carrier that has 700 million subscribers, seven times the size of the U.S.'s largest carrier Verizon Wireless. Greater China is Apple's third biggest market after the U.S. and Europe in terms of sales.
On Tuesday, Apple will hold an event at its Cupertino, Calif. headquarters, where it is expected to unveil two new iPhones. People familiar with the matter have said Apple is shipping a new high-end model and a cheaper version this month.
Bloomberg News China Mobile would give Apple access to 700 million subscribers.
Apple has asked Foxconn, its contract manufacturing partner, to add China Mobile to the list of carriers slated to receive a new low-cost iPhone, one of these people said. It isn't clear if the two sides have signed an official agreement or when the phones would be delivered.
The decision to offer a cheaper iPhone to China Mobile, one of the world's last major operators that doesn't carry Apple's smartphones, comes at a critical moment for Apple. The iPhone, Apple's best-selling product, is losing share to competitors including Samsung Electronics Co. and Apple is wrestling with the perception the company is starting to lose its innovative touch.
Apple's sales in Greater China fell 14% from a year earlier to $4.6 billion during its fiscal third quarter ended June 29. In the June quarter, Apple's China market share fell to 5%, ranking it seventh behind market leader Samsung, which had 18%, and a cluster of domestic manufacturers such as Lenovo Group Ltd. and Huawei Technologies Co., according to data from research firm Canalys.
China represents a significant growth opportunity for Apple, a comment Chief Executive Tim Cook made in April citing the large number of potential first-time smartphone buyers there. At the time, Apple has also pledged to double the 11 stores it has there in less than two years.
Overall smartphone shipments in China are estimated to rise 84% to 352 million units this year, or more than double that of the U.S., before increasing to 421 million units in 2015, according to research firm Canalys. China overtook the U.S. as the world's biggest smartphone market last year, making it all the more important for Apple to have more access to that market.
Apple was initially reluctant to bring its iPhone to China Mobile's unique and relatively unreliable third-generation network that slowed download speeds and made producing phones for the carrier more expensive, according to a person familiar with Apple's thinking. Meanwhile, China Mobile bristled at Apple's insistence on sales volume guarantees, a person familiar with the talks said.
Another issue that has hampered Apple's success in the country has been the phone's price, which is considered expensive for a majority of consumers, particularly when compared with domestic brands offering a product with similar technical specifications at a fraction of the price. Whereas U.S. carriers provide subsidies to lower the upfront costs of purchasing an iPhone, Chinese carriers' subsidies kick in later as refunds that can lower monthly phone bills. This does little to ease the initial outlay for a new phone.
But the two companies are now in a position where they need each other. Apple's China sales have fallen while China Mobile has been losing subscribers to China Unicom Ltd. and China Telecom Corp., two rivals that already offer the iPhone.
The current iPhone 5 is selling for about 5,000 yuan, or $815, without subsidies. The majority of smartphones shipped in China in the second quarter cost less than $200. Though Apple hasn't disclosed any details about the less expensive iPhone, analysts estimate it may come in at around $400, placing it in the midrange of Chinese handsets.
"The cheaper iPhone is definitely a game changer," said TZ Wong, a China smartphone analyst for research firm IDC. "For Apple, this will be an inflection point."
Morgan Stanley analyst Katy Hubertyin an August research report estimated that a $400 iPhone could increase Apple's China market share by 13 percentage points through the sale of an additional 20 million iPhones, potentially snatching away local customers from Samsung, HTC Corp. and Lenovo. A deal with China Mobile, Ms. Huberty wrote, could raise that sales bump to 32 million units, or about a quarter of the 125 million iPhones sold globally in the past fiscal year.
Apple's current iPhone customers in China are mainly from affluent cities like Beijing or Shanghai. But the growth opportunity is in smaller cities and towns where China Mobile is dominant and customers are now starting to trade in feature phones for smartphones. The sales network in those areas is also less developed and more dependent on the influence of carriers.
"For Apple's less expensive iPhone to really work, it's critical for Apple to make it happen with China Mobile," said Nicole Peng, China research director at Canalys.
In Shijiazhuang, a city of 10 million people several hours south of Beijing, 22-year-old Guo Jie is just the type of consumer Apple is targeting. Browsing the aisles of an indoor electronics mall in the city center, Mr. Guo said he wanted to upgrade his Samsung feature phone with a simple and cheap phone.
However, he said he'd be willing to pay a little more for an iPhone. "If it's 3000 yuan ($490), I would buy it," he said.
Ma Tao, who owns one of the cluttered booths in the mall selling everything from smartphones to laptops to electric razors, said many of his customers consider buying the older iPhone 4 because it is cheaper than the iPhone 5. In the end, most go with an alternative because the iPhone 4 is seen as too dated.
If Apple can provide a less expensive iPhone that looks like the latest model, Mr. Ma said "it will definitely be big."
The pricing pressure is especially intense, because the leading Chinese competitorsâ€"which also includes ZTE Corp., Yulong Computer Telecommunication Scientific (Shenzhen) Co. and Xiaomi Inc.â€" are willing to sacrifice short-term profits in exchange for market share with the view that today's entry-level consumers will become a foundation for the future.
Perhaps no competitor embodies this mentality more than Xiaomi Inc., pronounced sheow-mee. It has grown quickly by offering smartphones with top hardware specs on the cheap and marketing flair. Though relatively unknown outside of China Xiaomi sells the phones at low prices and tries to generate revenue later through Internet services that it offers on the phones such as games and messaging. Earlier this month, the company hired an executive from Google Inc.'s Android business, Hugo Barra, as it tries to expand overseas.
This week, the company released its newest flagship smartphone, the Xiaomi 3, which is priced at 1999 yuan ($320) and will be available on all three of China's carriers. The company also recently targeted China Mobile users with a cheaper 799 yuan ($130) phone. Xiaomi passed Apple in market share in the April-June quarter.
The low-price phones also mean that consumers expect more bang for the buck when they are paying a little more.
In June, Huawei launched its flagship smartphone, the Ascend P6, which is thinner than the iPhone 5 and comes with a 4.7-inch high-resolution screen. Even though the P6 is Huawei's most expensive handset, its 2,688 yuan ($440) price tag is roughly half of the iPhone 5.
Shao Yang, chief marketing officer at Huawei's device business, said consumers can now choose between buying its top-of-the-line smartphone or the lesser iPhone. "People who buy the iPhone often like to keep it out of their bags and put it on the table so other people can see it," said Mr. Shao. "But if it's the cheaper iPhone it may not be so easy to put it on the table."
â€"Juro Osawa in Hong Kongand Kersten Zhang in Beijing
contributed to this article.
A version of this article appeared September 6, 2013, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: Apple Nears Major China Expansion.
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