Can Apple beat Chinese counterfeiters?

Apple may be the rarest of US tech companies — one that can make gobs of money in China and not have to worry excessively about counterfeiting. The big question is how long Apple can enjoy its Chinese honeymoon before counterfeiters start eating into the bottom line.

commentary Apple may be the rarest of US tech companies — one that can make gobs of money in China and not have to worry excessively about counterfeiting. The big question is how long Apple can enjoy its Chinese honeymoon before counterfeiters start eating into the bottom line.

If the BirdAbroad blog is to be believed, Apple's counterfeiting woes may just be beginning. It has documented a stunning knockoff of an Apple Store. Yes, the whole store.

But first, let's get to the big picture and see how Apple's massive sales in China and knock-off goods are on a collision course.

The biggest — yet most overlooked — point on Apple's fiscal quarter earnings conference call were comments about China from CFO Peter Oppenheimer and operating chief Tim Cook. Simply put, Apple's future lies in emerging markets like China and Brazil. These regions had been off limits for the most part.

Sure, Apple has new MacBook Airs and OS X Lion, moves millions of iPhones and exceeds enterprise and consumer expectations on the iPad, but the real story is in China. Cook said:

China was very key to our results. As a reminder, for Greater — we define Greater China as Mainland China, Hong Kong and Taiwan — year-over-year it was up over six times. And the revenue was approximately US$3.8 billion during the quarter, and that makes the year-to-date numbers through the three quarters that we have had thus far around US$8.8 billion. So this has been a substantial opportunity for Apple. And I firmly believe that we are just scratching the surface right now. I think there is an incredible opportunity for Apple there.

The comparison to Apple in China is Microsoft. Microsoft makes little money in China due to piracy. Microsoft CEO Steve Ballmer stumps for intellectual property reform in China, and pitches quality over knock-off PCs. Good luck with that one, Ballmer. The reality: Microsoft pulls in less revenue from China than it does in the Netherlands.

If you take Apple's figures at face value, it appears that the Chinese actually buy that quality argument when it comes to the iPhone and the iPad. In other words, the Chinese consumer wants the real Apple over a knock-off.

I have a few eyes and ears in China. A friend of mine is regularly in China as a buyer for a major retailer. He's also a geek's geek. And yes, he comes home sometimes with full versions of Adobe PhotoShop for US$5, and every Nintendo DS game you can fit onto an SD card for a couple of bucks. As he handles headaches such as moving plants inland and dealing with factory shutdowns because the Chinese power grid is a mess, he also notices nothing but iPads on the train.

He's not so much stunned by the actual number of iPads on these trains as much as by the fact that they are real. "These people are actually buying the real thing," said my pal, a diehard Apple fan. You can find a knock-off iPhone here and there, but, for the most part, Apple sells a lot of real phones and tablets.

Piper Jaffray analyst Gene Munster said, in a research note, that China is crucial to Apple's future growth. Munster said:

We believe that Apple will extend its experience in China into India, Brazil and other key emerging economies in the coming years. Between China, India and Brazil, Apple is just beginning to find success in selling to 40 per cent of the world's population.

Cook added:

I am not saying at all that we have figured out precisely how to play perfectly in the environment; we haven't. I think we have more to do and more to learn, but I feel very, very good about our progress there. I think if any of us would have been told a year ago that we would do $3.8 billion in Greater China in a quarter, I don't think very many of us would have believed it. And I don't think any of you would have believed it. So we feel very, very good about it.

How long will this success last? Perhaps not for long, unless Apple gets its arms around potential counterfeiting. The BirdAbroad blog, run by a 27-year-old woman living in Kunming, documented Apple stores in Kunming. As you know, Apple just opened stores in Beijing and Shanghai.

From the BirdAbroad blog:

You have already guessed the punch line, of course: this was a total Apple store rip off. A beautiful rip off — a brilliant one — the best rip-off store we had ever seen (and we see them every day). But some things were just not right: the stairs were poorly made. The walls hadn't been painted properly.

Apple never writes "Apple Store" on its signs — it just puts up the glowing, iconic fruit.

The pictures on the BirdAbroad blog highlight some nice touches of a blatant rip off of an Apple store. Apple's job will be to shut down the stores. But the rip-off stores are probably just the tip of the iceberg. Apple is likely to have a lot more counterfeit fires to put out as it enjoys crazy growth in China. Those profits are only going to attract more con artists.

Via ZDNet US


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