Apple Targets China Markets

Apple wants to take a big bite out of China’s mobile market for technology through the release of the latest smartphone and recent launch of iPad tablet, but the company faces big hurdles with pricing and piracy.

Apple also is opening two new stores in Beijing and Shanghai in a bid to double its retail presence in the world’s most populous nation. The company already has one store in each city, and it plans to open 25 more new stores in China by the end of 2011.

The iPhone 4 was released with the same high profile and fanfare as the iPhone 3, released last October. The iPhone 4 is available in the Apple stores as well as at China Unicom outlets (for customers with a two-year contract), according to a company news release. The 16-gigabyte version of the phone costs 4,999 yuan ($745) while the 32-gigabyte version sells for 5,999 yuan ($895).

The iPad was launched in China last Friday, and hundreds lined up outside Apple’s flagship store in Beijing for hours to be the first to purchase the popular device. The same sort of anticipation was evidenced for the iPhone 4.

WMB believes the sales of this device will be equally impressive as earlier products from Apple. (In fact, analysts expect it will likely sell out by the time this post appears in the blog.)

“It is going to be successful. People are going to line up,” said Frank Yu, founder of Kwestr, a Shanghai-based web services company. “It is going to be sold out, that is my guess.”

Sales of the iPhone 3 were initially lackluster with Hong Kong-based China Unicom selling around 5,000 units in the weeks following the device’s launch in 2009.

Sales increased significantly earlier this year after the mobile operator lowered rates for its bundled iPhone packages as well as adjusted tariffs for 3G access. These fees remain expensive in China, according to Analysys International, a Beijing research firm.

During the second quarter this year, Apple became the fifth-largest smartphone supplier in China with slightly more than 7 percent of shipments, according to Analysys. Nokia had the largest share with 26.7 percent.

Industry analysts say what is worth noting about the recent iPad launch and new iPhone 4 release is a change in how quickly Apple is introducing its products to the Chinese market.

China has 420 million web users and about 233 million use mobile phones and other devices to access the Internet, according to government statistics. That number is likely to more than double by 2014, according to a report from the market research firm, eMarketer.

Cheaper smartphones combined with more affordable data plans from operators are expected to drive growth. Today, the country has more than 800 million mobile subscribers, making it the largest handset market in the world.

Apple waited over two years to launch the iPhone 3GS in China; these were launched in the United States and other western markets in 2007. By contrast, the iPhone 4 went on sale in the United States, France, Britain, Germany, and Japan in June and July. The iPad was released in the United States in May.

Apple’s Market Delay Proved Costly

The result of Apple’s delay in the release of the original iPhone 3 created a huge “gray market” of fake iPhone or iPhones smuggled in from Hong Kong, Taiwan, or elsewhere. Many said this served to undercut sales when the authentic product was released in 2009.

“Apple had already lost all of the early adopters in China who wanted to have that fancy iPhone,” according an industry expert Frank Yu. “We all had already bought an iPhone.”

Jake Saunders, a technology researcher at ABI Research (Asia Pacific’s division), speculated that Apple was having trouble in its negotiations with Chinese mobile operators to come up with an exclusive deal to bundle subsidized handsets with service contracts.

“Apple also has a revenue sharing model in place, which is a stumbling block in the Chinese market where ARPU (average revenue per user) is one of the lowest in the world.” Others saw the delays as a sign that the California-based company simply was not interested in reaching Chinese customers.

In July, Liu Chuanzhi, head of Lenovo, China’s leading PC maker, told the Financial Times that Apple did not care about China and that if the company “were to spend the same effort on the Chinese consumer as we do, we would be in trouble.”

Yet some say the quick release of the iPad and iPhone 4, along with the new store openings, are signs that Apple is not only taking China more seriously but also gaining a greater understanding of its massive mobile market.

The company, for example, released the iPad in its stores without any exclusive deal with operators to link the 3G to the device, which also has wireless capabilities. This means Chinese consumers, most of whom buy pay-as-you-go plans separate from their handsets, are not tied down to lengthy contracts.

“They must have realized that the Chinese market is so huge, and it is not the same as other markets,” said an industry insider who declined to be identified because of his company’s ongoing operations in China. “With the quick launch of the iPad without any negotiation with operators, I think now they don’t care about the 3G connection. They believe it is not that important, at least not in China.”

Big Challenges: Piracy, Pricing

But Apple may face further challenges in China. While the company’s products are especially popular among China’s expanding middle- and upper- classes, who have disposable income to spend on high-end products to show off their wealth, the iPhone is still too expensive for many to purchase.

Additionally, the Chinese version of Apple’s App Store still has an interface in English and requires payment from dual-currency credit cards, which many Chinese still don’t have.


There’s also no shortage of pirated iPhone applications available online for free, undercutting Apple’s abilities to generate revenues from its iTunes stores. An impending explosion of low-cost smartphones running Google’s Android operating system also could thwart Apple’s growth potential.

Local application developers say they are now turning their focus to creating Chinese applications for Android devices and are only building iPhone apps for more profitable international markets.

“China is going to be an Android market. There will be millions and millions of Android devices here, and right now a lot of companies, even iPhone development companies, are starting to work on Android application development, says Wang Bo, founder of Bokan Technologies, a Beijing-based application development company.

Still, it does not appear the demand for Apple products among status-obsessed Chinese will go away any time soon. WMB believes Apple will continue to expand in China, especially at the expense of Nokia and BlackBerry. The competition and stakes are very high for all concerned.

This post is by TechMan, WMB co-author who blogs about trends, issues and ideas affecting business, industry, technology and consumers. If you like this post, please share it with family, friends and colleagues!