Why Apple investors should be fretting over Japan, not China

Apple could see its market share in Japan fall by around 20 percent over time with "trouble brewing" in its highest margin country, UBS said in a note on Tuesday.

While investors focus on Apple's recent struggles in China, UBS suggests that a number of regulatory and competitive factors in Japan – which accounts for around 8 percent of the iPhone maker's revenue – could be a cause for concern.

"There is some trouble brewing, though, that we believe could affect Apple's growth. First, Japanese carriers are no longer as aggressively using discounts on handsets to lure subscribers from other carriers, which could affect phone sales," Steven Milunovich and Benjamin Wilson, two analysts at UBS, said in a note Tuesday.

"Second, our industry contacts indicate that while the Apple brand remains strong, cheaper alternatives are making inroads with Apple's share potentially declining over time from 50 percent to 30 percent."

Apple logo at the Apple Worldwide Developers Conference
Andrew Burton | Getty Images

The Japanese government has expressed concerns that mobile carrier charges are too high and is looking into ways to reduce this. Typically, carriers subsidize handsets then claw back the money through high tariffs. If the Japanese government cracks down on the high prices, it could hit Apple, UBS suggested, as Apple charges a 15 to 20 percent premium on iPhones relative to the U.S.

At the same time, UBS noted that the "growing influence" of Mobile Virtual Network Operators (MVNOs) could be a problem. MVNOs are mobile carriers that use other networks' infrastructure. They offer SIM-only services at lower rates. Users tend to buy their own device outright, rather than through a carrier contract. This could hit Apple.

"There appear to be over 5 million MVNO subscribers, and they are likely to hold onto old phones longer. So there is a potential double whammy to Apple of handset share loss and longer upgrade cycles," UBS said.

Japan is a crucial market for Apple. In the U.S. technology giant's fiscal second quarter, it posted a 24 percent year-over-year rise in revenues while every other region saw declines. It is also the market in which it commands the highest margin on its iPhones.

Apple shares are down over 12 percent this year with investors fretting over growth in China as well as whether the upcoming iPhone 7 will be a hit. The company has tried to assuage fears by expanding its presence in other markets such as India and touting the success of its services such as Apple Music which analysts see as key to its future revenue growth.