Is Apple losing its cool in China?

Is Apple losing its cool in China?

Summary: UBS analyst Steven Milunovich notes that the iPhone is a luxury brand in China and that bad news could lie ahead if Apple doesn't lower its price and differentiate itself from the increasing competition.

TOPICS: Apple, iPhone, China
Is Apple losing its cool in China? Jason O'Grady

Although sales of the iPhone 4S have slowed significantly, most of that can be attributed "seasonality" -- a.k.a. anticipation of the iPhone 5. Apple's new hotness is rumored to be announced on September 12 and begin shipping on September 21.

According to UBS analyst Steven Milunovich smartphone penetration in North America and Western Europe is over 60 percent and growth has slowed to 15-20 percent. Meanwhile, Asia-Pacific has smartphone penetration of only 30 percent and growth of 77 percent in Q1 2012.

In comparison to North America and Europe the Asia-Pacific market is virtually untapped because it's half as saturated. UBS estimates Chinese iPhone users have climbed steadily from 2 million in 2010, to 8 million in 2011 to upwards of 25 million currently. iOS penetration exceeds 10 percent in Beijing, Shanghai, and Guangzhou.

That's the good news. 

The bad news is that although the iPhone's enjoyed early success in China it's very much a luxury brand and customers have to dip into their savings to purchase one.

To compensate for the extra expenditure, upper middle-to-high income urban households would need to use 30-45% of annual savings to afford an iPhone, whereas the top decile urban household would need to deplete 19% of annual savings to afford an iPhone.

Beyond the issue of cost, Milunovich suggests that the Apple brand might not be as popular as it was 6-12 months ago. Although there's a "cool factor" to carrying an iPhone in China because it suggests a level of affluence given its cost, that "coolness" might be waning.

Another factor that might contribute to the iPhone's cooling in China is the perception that the Galaxy S has "trumped the iPhone in features." Heavy competition from less expensive phones (from the likes of Huawei and Xiaomi) that are considered "good enough" only makes matters worse.

Milunovich notes that Apple must "earn its premium brand reputation every product cycle." 

Another factor holding the iPhone back is Apple's lack of a carrier agreement with China Mobile, the nation's largest wireless carrier which has  688M customers as of July 2012. Although the iPhone 5 is expected to support TD-SCDMA, China's 3G network, Milunovich doesn't expect China Mobile and Apple to form a strategic alliance anytime soon.

China Mobile even might not ink a deal until it receives an LTE 4G license, which could come in 2014. Also, discussions with China Mobile suggest less interest in the iPhone today.

It's hardly an epidemic though. The iPhone 5 is certain to sell well, but will it be different/better enough to justify spending 30-45 percent of one's annual income to own? Or will the Chinese opt for significantly less expensive smartphones that are "good enough?"

Topics: Apple, iPhone, China

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  • what does "smartphone penetration" even mean?

    it can't mean market share, iphone has no where near 60% market share. android holds that title. so what is "smartphone penetration"? just some made up crap?
    • Smartphone penetration

      Smartphone penetration means that the writer has an iphone stuck up his ___
      • Apple's litigation is uncool

        And that will sooner or later show up in sales.

        And not only China, though worldwide. North America is the exception. Sales figures and Android penetration sjw it.
        • Here's what I'm not seeing

          Why is it that when Apple sues over it's IP it's "not cool", "Apple sucks", or whatever the iHater mantra of the week is but it's perfectly fine for other companies to sue to protect their IP?
          • You mean counter sue

            to fend off Apple's patent trolling.
          • No, read it again

            He said: "Why is it that when Apple sues over it's IP it's "not cool", "Apple sucks", or whatever the iHater mantra of the week is but it's perfectly fine for other companies to sue to protect their IP?"

            Don't you know how to read?
            Cylon Centurion
      • As opposed to you

        having an Android phone stuck up your ____.
        • Not everyone is into that

          It may seem ordinary in the Apple crowd, but it's really not a common thing to do with a phone.
  • Arithmetic needs work

    Something about the pricing in the article doesn't make any sense. Early in the article, we're told that an iPhone could cost "30-45% of annual savings." Later in the article, the price is said to be "30-45 percent of one's annual income."

    I looked up some typical salaries in China. A computer programmer makes around $1,000 per month. I do not believe that an iPhone in China sells for over $4,000.

    The household savings rate in China is around 25%. If the computer programmer making $12,000 per year saves 25% of that, and then spends 40% of that on an iPhone, he spent $1,200. That still sounds pretty high. The story about the kid who apparently sold his kidney to buy an iPhone said the price was $633.
    Robert Hahn
    • Avarage salary

      Probably the income in this article is total avarage for China citizen, which will be a lot less then avarage salary of a professional with higher education degree.
      • average salary in China (everyone, not just computer programmers)

        is about $40,000/year. this whole article is pure bullshit.
        • whups

          that should read yuan, not dollars. less than $40,000 but the article is still bullshit.
        • I just read the average yearly salary is 14,000 USD

          But this one is more clear -

          William Farrel
    • Sloppy writing

      Original stats "30-45% of annual savings" misunderstood or just carelessly copied into "30-45 percent of one's annual income".

      It's got to be savings as the iphone does not cost $4k+ even in China!
      Little Old Man
      • I would hope not...

        As much as I like my iPhone I would not pay $4,000 for one.
  • Soon to be a phone for loosers?

    User A: Hey, I just have the latest iPhone.

    User B: Is it something from a law firm that sues everyone? What does your iStuff has to do with phone?
    • "Loosers"?

      So what was loosed? IOW there is a difference between the word "loser" and "looser"... The former implies that they lost the latter implies that something is not as tight.

      The rest of your post makes little sense.
      • Losers, sorry was typos

        Thanks for spotting the typo. And you are right, my post was a rant against the crazy iPhone mania in China. I heard recently a story of a guy who sold his kidney to afford to buy iProducts, or other stories where people took a lot of troubles just to be first in line to by a 4S. If I was Chinese, I would rather buy the phone made by a China company which happens to be comparable or may be even better than the overpriced iPhone.

        The notion of "loser" might be actual real. If someone happened to be among the "privileged" owners of an expensive iPhone 4S. Then this someone looks with envy at the features of the recent Android phones of the "poorer" fellows. It looks like he/she is just a naive who got scammed.
        • But that's the thing -

          the iPhone IS made by a Chinese company.
          William Farrel
          • The high price is part of the appeal

            This is a fact all over the world. If you pay a lot for something it says " look at me I can afford to waste my money and you can't. Part of being an apple fan boy is being a snob, an equipment snob. I am very familiar with this because my brother-in-law and his whole family are snobs and they are ALL fanboys.

            Holidays I have to endure all the statements we see here. They are sooo much better than anything else: they really design the best hardware: They cost a lot more but but if you could afford it "like me" you would understand.

            Have you ever been to an expensive restaurant and gotten a lousy meal. Then you look around and most all the customers are snotty upper class who are driving MB's and BMW's. They aren't there for the food they are there because it is a status symbol.

            Apple marketing has managed to put themselves into this niche. They make great looking things but in a lot of cases for the price it is an empty box.

            If I have come off sounding like I have a lot of issues---- I do, But I speak from experience. I was a Mercedes mechanic " I won't use the word Tech" and for 2 years was a 24 hr road side MB mechanic. The stories I could tell and the wanabe's I met have given me a new spin on the human condition.