Analysts are always saying that China is critical to the future of technology companies, but they seldom explain why. Well, did you see the movie Moneyball? It told the story of how the Oakland A’s consistently fielded a very good team at a substantially lower cost than the big-market baseball teams did.

How did the A’s do it?  By signing the most undervalued players based purely on statistics – not how they looked, or how they conducted themselves off the field. This, combined with a good farm system, produced a very good team.

Technology is very similar, as it can be exported anywhere; all that is absolutely required for a tech company to succeed is a market that can utilize their products in a very big way. China and India are two very large examples of Moneyball-type opportunities for tech companies.

When I was growing up, the only images I ever saw of China was streets teeming with people either walking or riding bicycles. Thirty-plus years ago China had been run for decades by a single individual – Mao Zedong – who only understood communist theory, which focused on the poor conditions of the industrial workers. So Mao never tried to industrialize his country. At the end of his rule he did try and produce steel in villages; however, his effort was so naïve it simply resulted in the melting down of most of the metal products within China.

After Mao’s death, the new leaders of China’s ruling party began a concerted effort to invest in the infrastructure to create an industrial base, starting in the 1980s. We in the West saw or heard nothing about the efforts and were stunned in the late 1990s when China eventually began to produce low tech products in ever increasing volumes.

With a billion-plus population – most of which who had virtually no wealth – China had a very real cost advantage for low-cost production. The world took notice of this and quickly China began to create a very real economy. Just as the United States did in the latter 19^th century, China now has second largest economy in the world (in GDP) and a growing consumer middle class. We can quibble over exactly what China is reporting but the U.S. multinational tech companies do track what they are selling into China and those sales are very real and increasingly ROBUST!

India is further behind China in the ninth slot, but is also expanding its economy at a very healthy rate. The difference is the amount of investment China made versus India that has created this huge gap. Everyone knows that China has been contributing its low-cost labor to assemble smartphones; however, what few really understand is that China’s economy has grown to the tipping point where they now have the consumer wealth to buy the finished Smartphones, PC’s and other tech products.

So let’s measure all these macroeconomic trends in the marketplace. The product market that we will use is smartphones. In the U.S., the Android operating system has the majority of the market share, with Samsung leading the Android handsets. However, bear in mind that even though Apple (NSDQ: AAPL) has a smaller share, they have much greater profit due to the price of their devices.

Samsung is attempting to break through into the higher-end smartphones, but a recent court ruling on patent infringement of Apple’s patents has left them in a precarious position. They will have to innograte at a much higher level in order to compete with Apple from here on out. In 2013 Samsung sold about three of every 10 smartphones globally. In the U.S. the smartphone market is reaching maturity and therefore sales are slowing here.

In China the same basic market geometry exists as well. However, in China Samsung and Apple must grapple with more competition – most of which are Chinese manufacturing companies. In the last quarter Samsung announced a sharp decline in profit. The reason for this is Samsung must now compete with low- and mid-range smartphones from Chinese companies like Lenovo (OTC: LNVGY).

Lenovo has been selling low-end smartphones in its homeland; sales are up 92 percent year over year. Lenovo has also purchased Motorola’s cell division from Google. Therefore, Lenovo is significantly ramping up its smartphone technology while Samsung will have to cease using the technology that has been ruled as having been misappropriated from Apple.

The situation is growing even grimmer for Samsung as South Korea – Samsung’s home country – and China are negotiating a new trade agreement. It is doubtful that the Chinese government will provide terms which improve Samsung’s ability to compete head to head China’s smartphone makers. Why would they?

One must understand that when Lenovo bought IBM’s PC unit and PC server business along with the Motorola unit from Google, the executives from IBM and Google had to get permission from the communist party in China before the deals could be done. The reason why Samsung’s profit declined 25 percent in the last quarter is because of declining sales in China.   

Samsung is getting squeezed from above and below as a result, as Lenovo and two other Chinese smartphone makers furiously compete for the low- and mid-range phones while Apple continues to grow its share of the high-end market. Apple recently inked a deal with China Mobile to sell their phones in China. China Mobile is the largest cell company in China, somewhat akin to our Verizon. Apple announced 12 million in smartphone sales in China which is up 25 percent from the first quarter of 2013 compared to the first quarter of 2014.

Brand strength is no different in China than it is in Europe or the USA. Apple will continue as the “must-have” phone in China with their fuller ecosystem of apps and much higher integration of function and features than Samsung. Samsung cannot climb up to take share from Apple on the upper end as their sales decline on the low end.

Samsung’s strategy of releasing cool new features for young people in spite of less elegant integration is starting to show significant cracks. Samsung’s decline in tablet sales is very likely an outgrowth of this same market dynamic for Samsung in China and Europe. Samsung depends on 20 percent of its revenue from China. Samsung is also 16 percent of South Korea’s annual GDP.

Apple has announced major sales growth in the last quarter – India up 55%, Russia up 97%, Brazil up 61% and Turkey up 56%. Apple continues to surge because they own the top-end of the market. This allows them to cut the prices of their older Model 4 phones, which were slowing in sales due to the newer Model 5s superior functions and larger size. This dynamic is a card the king of the hill always has at its disposal to play whenever it likes. In countries like India the features of the Apple 4 and 4s are better than some of the local Indian smartphone makers.   

Lenovo is also increasing its market share in China. Lenovo has yet to release smartphone models in other geographies such as Europe yet, but once they do expect Samsung to decline further based on home field advantage in China and increased revenues from new markets.

Not all lights are green for Lenovo – at least not yet. They are competing with Huawei and Xaiomi on the low end in China and in India. Huawei scored wins on increased low-end hand set sales in China and India this year. However, those companies don’t have the richer ecosystem that Lenovo is developing. As a result they are not as dependent on phone subsidies which we have in the US through carriers such as Verizon and AT&T.

China may cut back on its phone subsidies, and phone subsidies don’t exist in India at all. However, Lenovo is the number one PC seller in both India and China. This, along with the technology they purchased from Google, is the basis for their stronger ecosystem.

An article in the India Economic Times observed: “Lenovo credits its success in the PC market to its “Protect and Attack” strategy borrowed from the Art of War, an ancient Chinese military treatise believed which lays emphasis on the timing and energy of the attack, as well as the importance of positioning on an advantageous terrain. After its initial success in China, Lenovo opened its India beachfront in smartphones just ahead of Diwali, a festive season traditionally known for good gadget sales.”

“We will follow an attack strategy to start with in South and West of India. We are consciously launching the devices only in a few states to start with. We want to concentrate on our sales force and attack the market with a vigour, rather than spread ourselves too thin,” says Ashok Nair, who heads Lenovo’s sales unit in south India.

While Apple will continue to be king globally, Lenovo’s effective innogration strategy appears to have them positioned to displace Samsung as the leading Android smartphone maker in both China and India. This will make them the number two smartphone maker in the two markets that are ascending most rapidly.

Apple is a ‘buy’ in our Investments Portfolio up to $95.

Lenovo is currently a ‘hold’ in our Equity Trades Portfolio above $25.