Apple’s China Strategy: Venturing to the Edge of Coolness

 

Apple Inc.
Apple Inc. (Photo credit: marcopako )

IPhone Scarcity During Chinese New Year May Give Samsung a Happy Holiday – Bloomberg.

 

Right before Chinese New Year, Bloomberg’s Ed Lococo interviewed me for this story, asking me how much I thought iPhone sales would be affected by the company’s decision to sell the newest version of its handset via online channels only. The quote in the story is a good one, but there is more to what I told Ed.

First, I do not expect Apple unit sales to suffer severely from this shift in distribution. When the Chinese people want a product that is difficult to get, they tend to find ways to get it, as evinced by the huge gray market in iPhones that existed long before they were introduced in China. The Chinese consumers who can afford these devices are net-savvy, and the online store will not present a major obstacle, and they should continue to be available through China Unicom’s retail outlets.

I also expect Apple will see a jump in iPhone sales through Apple’s channels in Hong Kong and other major Chinese New Year travel destinations for outbound PRC tourists. However, I noted:

A large portion of Chinese New Year sales are about having the gifts in hand right now, so I expect that Motorola, HTC, and Samsung, all of whom offer Android devices competitive with the iPhone, will benefit among buyers who are ambivalent about the brand of their device or who were on the fence about Android.

Ed also asked me whether I thought Apple would use this as a justification to expand its distribution in China, adding carriers or retail outlets. I imagine Apple will continue to expand its stores, albeit slowly, but I also think they walk a fine line between stoking demand and burning its mojo.

Apple owes much of its profitability in China to the perception that its devices are highly desirable yet difficult to obtain. The company is likely loath to tamper with that aura by significantly broadening its distribution, and that doesn’t even address the engineering challenges of creating an iPhone that will work on China Mobile’s TD-SCDMA network. Apple’s problem is that once two or more carriers offer the device and the phone seems to become ubiquitous, the mystique falls away and Chinese consumers will look elsewhere for their desirable device.

Make no mistake: most of Apple’s recent converts in China are much less emotionally vested in the Apple ecosystem than their counterparts in Japan or the United States. Apple is making a valiant effort to change that, but it needs more time, perhaps years, to develop in China the devoted following it enjoys elsewhere. Until then, it needs to remain in the business of making pretty, hard-to-get devices for prosperous people.

Michael A. Robson

“Apple owes much of its profitability in China to the perception that its devices are highly desirable yet difficult to obtain. The company is likely loath to tamper with that aura by significantly broadening its distribution,”

Insane logic. Apple gears sells all over the world. You wanna see a future iPhone user, grab a Android user and ask him/her how they like their phone. Apple can’t really lose in China, because they make all their money on selling HARDWARE. Microsoft hasn’t made a dime in China (piracy). See the difference?

David Wolf

“Insane logic.”
Not at all. Apple sells its products at a premium. Part of that premium is based on utility, but part is based on the iPhone making a personal statement as a luxury item. If everyone was carrying an iPhone, it would lose its cachet and thus some of its value.

“You wanna see a future iPhone user, grab a Android user and ask him/her how they like their phone.”
How does that square with a 13.1% fall in iPhone market share from Q3 2011 to Q4 in China? Ugly truth: as good as the Apple experience is, lots of people in China aren’t willing to pay a premium for the difference between Android and Apple, and that number will likely grow as Android goes 4.0. Aside: I’m Apple everything EXCEPT that I carry an Android phone. My wife has an iPhone, but I’m sticking with my Droid III because it cannot touch the iPhone for how I need to use a mobile device.

“Microsoft hasn’t made a dime in China (piracy).”
Your information is out of date. While piracy still accounts for around 78% of Microsoft software used in China, a concerted program begun in 2003 by then-MS China CEO Tim Cheng and his right-hand man David Kay has brought the number down from 93%, with the trend continuing. The Wall Street Journal estimates that in 2010 Microsoft revenues from China passed US $2 billion.