Apple (NasdaqGS: AAPL) unveiled the latest iteration of the iPhone yesterday. The Apple iPhone 5 (actually the sixth version counting the current device, the iPhone 4S), is taller, thinner and lighter than its predecessors. It also boasts a larger screen and a faster processor.

The Apple iPhone 5 will also be able to run on the latest 4G LTE networks. Most analysts saw that as a must, as many competing devices, such as Samsung’s new Galaxy S III, already have this capability. 4G networks, which telecom providers are quickly rolling out across the U.S., are up to five times faster than the current standard.

Otherwise, the changes amount to enhancements on what has been a winning formula for the company so far. They include a faster processor, an enhanced camera and longer battery life. One change likely to irk Apple fans is a new connector to dock the device to computers, chargers and sound systems. Until now, the iPhone had been using the same connector as its iPod music player. The company says it will now sell an adapter to hook the new phone up to older accessories.

Apple iPhone 5 Launches Into a “Notoriously Fickle” Market

It’s hard to underestimate how much the iPhone means to Apple. According to MarketWatch.com, the device accounted for 53% of the company’s total revenue in the first nine months of its current fiscal year. Apple shipped over 98 million iPhones in that period, up 77% from a year ago. The company doesn’t break out its earnings by product, but it likely also gets the majority of its profits from the iPhone.

At the same time, the smartphone market is becoming more crowded as other manufacturers—including Samsung—crank out devices powered by Google’s (NasdaqGS: GOOG) Android operating system.

All this had many wondering if the company had gone far enough with its iPhone redesign, including Ovum analyst Adam Leach:

“Whilst the company is still reaping the rewards of the brand equity of the iPhone, consumers are notoriously fickle when it comes to buying handsets,” he said in a CNet.com article. “Without the continued innovation that we are accustomed to with Apple, the company risks losing consumer appeal.”

Brand Loyalty, Pent-Up Demand Will Spur Apple iPhone 5 Sales

Even though the device boasts few new features, the enhancements that the company made to the Apple iPhone 5 are still likely to be a hit with consumers (JP Morgan even estimated that the device has the potential to boost America’s GDP by an annualized rate of 0.25% to 0.5% in the fourth quarter).

That’s partly because of pent-up demand. In Apple’s 2012 third quarter, which ended June 30, it sold 26.0 million iPhones, up 28% a year ago. Any company would be happy with that type of jump, but the figure fell short of the 28.4 million that analysts expected and was down sharply from the 35.1 million the company sold in the previous quarter.

The reason: owners of previous iterations of the iPhone were waiting to get their hands on the new device. Now that they can, starting September 21, and Apple’s iPhone sales will likely spike as a result. That will help it build on its 16.9% share of the global smartphone market and better compete with Android devices, which combined have 68.1% share.

Moreover, Apple boasts the highest customer loyalty of any smartphone maker. According to a November 2011 study by research firm GFk, Apple can count on 84% of iPhone users going with a new version of the device for their next phone. That compares to 60% of Android users and just 48% of BlackBerry owners.

To top it off, the launch was perfectly timed to take full advantage of the Christmas shopping season. That’s a huge missed opportunity for competitor Research in Motion (NasdaqGS: RIMM) which was forced to delay its new BlackBerry 10 smartphones until the first quarter of 2013.

Huge Growth Potential in China

Looming in the background is the fast-growing Chinese smartphone market, which has huge potential for Apple. The country’s appetite for the devices is exploding. According to technology research firm IHS, 160 million smartphones are expected to ship in China by the end of this year, up 141% from 2011. By 2016, that number is expected to jump to 333 million.

At the same time, the iPhone is an also-ran in China: in the first half of 2012, Apple shipped 5.2 million of the devices in the country, good for 7.5% of all smartphone shipments. That was well behind market leader Samsung, with 20.8%. The main problem? Current versions of the iPhone don’t work on networks that use TD-SCDMA technology, which was developed in China. That means the device can only run on networks run by China Unicom and China Telecom, but not China Mobile, the country’s—and the world’s—largest provider, with 667 million subscribers.

However, the company has reportedly held talks with China Mobile about selling the iPhone. As well, Qualcomm (NasdaqGS: QCOMM) has developed a chip that will make the device compatible with China Mobile’s network. It’s unclear whether this chip is in the iPhone 5, but analysts at Jefferies & Co. think it’s a strong possibility. In a research note issued after the launch, they wrote:

“The event did not address TD-SCDMA support, but we expect teardowns to reveal that the iPhone 5 uses Qualcomm’s MDM9615 modem chip (supports LTE and TD-SCDMA) and Qualcomm’s WTR1605 transceiver (also supports LTE and TD-SCDMA), which means that the iPhone 5 can likely support TD-SCDMA if Apple enables the functionality.”

CNBC.com went further, describing a deal with China Mobile as “imminent,” and saying that the new device does indeed support the wireless company’s network standard. “It’s going to mean a significant increase of Apple sales into China,” said Tucker Grinnan, HSBC’s head of regional telecom research.

If that’s true, it would be far and away the most important enhancement to the device from an investment standpoint. But either way, the iPhone seems unlikely to stay on the sidelines in China for much longer.

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