The one country Apple can't crack: China

The one country Apple can't crack: China

Summary: Apple comfortably leads most global mobile markets with its popular iPhone. In China, however, it's only seventh. A lesson in localization.

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TOPICS: China
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Let's get the obvious out of the way: China has a dizzying number of consumers with smartphones. Thanks to this scale, Apple sells millions of its popular iPhone there. It is by no means a failure.

But unlike most mobile markets, in which Apple leads the pack by a significant margin or at least is among the top three vendors, China is dominated by other companies. Typically dominant Apple ranks seventh here, according to new IHS data for the first half of 2012.

In its report, the market research firm called the iPhone an "also-ran" in China. While I wouldn't go that far, the country is certainly the biggest challenge Apple has to date. And that's worth a closer look.

Here's what IHS had to say about it:

For Apple, this represents both a challenge and an opportunity. To succeed, Apple must offer products that have pricing and features that appeal to Chinese consumers and that fit in with the country’s wireless business models. If Apple can do this, it stands to cash in on the country’s smartphone market, which is experiencing booming growth.

But it's not that easy. In this (massive) insular local market, Apple is no sure thing.

Leading the Chinese market is Samsung, with 20.8 percent of shipments. (To contextualize things, Apple moved 5.2 million units, for 7.5 percent of the market.) Lenovo, Coolpad, Huawei, Nokia and ZTE all rank ahead of the American interloper; Motorola, Sony and LG are just behind.

Part of Apple's trouble, according to IHS, is that the iPhone doesn't comply with the fast-growing domestic TD-SCDMA air standard. IHS also says a lack of a low-end smartphone model also hurts the company -- in China, many consumers purchase phones directly, rather than through carriers at a subsidized price, IHS says.

I'm not quite convinced of this argument. I don't know many consumers, aside from the lovable tech geeks who read ZDNet, who purchase phones based on the air standard. (Go on, ask your buddy what tech his phone uses to connect to the cell tower. See how he reacts.) And while there's always a low-end market that speaks to high volumes and thin margins, Apple has rarely played here. It usually takes several generations of products, and increasing market share, for Apple to begin seeking newer, less profitable customers.

So the question, in my mind, is why Apple can't capture the hearts and minds of Chinese consumers. The company is a pop culture icon in the U.S. and elsewhere, respected for its industrial design, user experience and marketing chops. It retains an aspirational air about its products even as it undercuts competitors. In China, it's just another vendor, albeit a coveted one. Silly as it sounds, I suspect that's the difference.

The challenge is steep. China expects to see 160 million smartphones shipped by the end of this year, an increase of 141 percent from 2011. 

But we shouldn't be asking what Apple isn't doing; rather, we should look at what's working for Samsung. I'm not familiar enough with the market to know what's working for Samsung, but a recent Gartner report suggested that the company's wide availability in China is helping. (Apple's deals give it access to 34 percent of the market; a deal with China Mobile would turn the tables, according to that report.) 

So it's really a question of leverage: will Apple make more money by dominating the slice of the market to which it has access, or will it make more by striking an unfavorable deal with the carrier that holds the key to the rest? If the U.S. is any indicator -- again, it's apples to oranges, but still -- Apple's more inclined to the former.

After all, what good is market share without the margins?

Topic: China

Andrew Nusca

About Andrew Nusca

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. During his tenure, he was the editor of SmartPlanet, ZDNet's sister site about innovation.

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12 comments
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  • Share source code with them

    Zdnet reported Microsoft sharing source code with Russia and China, and openly stated they tolerate piracy there (CNN) to ensure product usage and dominance, so why not Apple?
    HypnoToad72
    • Microsoft in the Manger

      >>and openly stated they tolerate piracy there (CNN) to ensure product usage and dominance
      Yeah, all villain dogs in the manger behave like that.
      eulampius
  • air standard is totally relevant

    the average person doesn't consider the term "air standard", but how many sprint and verizon customers have been, until recently, jealous over not being able to have an iphone? that's 100% because of air standards. until recently, apple did not make an iphone that could run on verizon or sprint's networks, and those customers could not buy an iphone, even if they wanted one badly (unless of course they switched carriers, which many were unwilling or unable to do).
    theoilman
    • That's simply not true.

      Hardware was never a true barrier to a deal between Apple and the carriers in question. It was merely a matter of an existing contract's exclusivity rights (AT&T) and, after that, negotiations around the terms of a contract with the other carriers.
      andrew.nusca
      • T-mobile

        for a long time people were using iphones on T-mobile even during the contract exclusivity. the phones had the right band capabilities, so they were used. Verizon and sprint customers had no such option. I'm sure more people in China would get iphones if they supported more air standards
        theoilman
  • are you kidding?

    Only China? Give us a link if you want us to believe you did not make it up.
    pupkin_z
  • Whew

    The smart analysts I pay attention to have identified India as Apple's uncrackable territory. I guessed they turned it around in the sub-continent, so that now China, where they have stores and sales, is at the top of the do-better list.
    DannyO_0x98
  • Silly but sane...

    "In China, it's just another vendor, albeit a coveted one. Silly as it sounds, I suspect that's the difference."
    Silly as it can sound, I always tought that there's something fundamentally wrong buying all that "Buy a lifestyle- Think different" corporate crap. It seems that chinese are among the few sane people that consider pragmatically the acquisition of a smartphone...
    acosta@...
  • $$$, China Mobile TD-SCDMA, prepaid

    The main reasons Apple aren't the leader are
    - large percentage of people buy their phones outright.
    - most people in china don't have 5000RMB to spend on a phone.
    - Local vendors produces phones at price points for local people in Android thus win the majority of the sales.
    - Over 650 milllion subscribers are on China Mobile and if they want 3G its a TD-SCDMA phone.
    - most chinese buy their SIM card as a prepaid off a street stall and many have different cards for different provinces to avoid the hideous roaming charges.
    Apple will be lucky to get 10% which is the rich and middle class in Tier 1 cities, but at the moment its facing problems in Shanghai and Beijing - iphone 5 is coming so slow sales, rich people won't buy iphone because their secretaries and assistants are starting to walk around with a iphone 4s, Apple was seen as an exclusive brand now its loosing its lustre.
    damianholmes
  • Price and Patriotism

    Duh!?!? Apple still has a price premium and even though lacking freedoms Americans are used to, the Chinese still have a greater sense of devotion to their homeland and domestic products.
    partman1969@...
  • ...and

    North Korea. I'm pretty sure they haven't conquered that market either.
    BigTipper
  • "...even as it undercuts competitors"

    Interestingly, I linked to this article from one showing what ridiculous profit margins Apple has (from recently unsealed court documents tied to their aggressive lawsuit activities).

    The iPhone is THE highest priced phone out there... along with their laptop, PC, server, netbook, and even tablet offerings. They don't undercut anyone!

    On top of that, barring perhaps the PC/server/laptop segment, they tie you to their monopolistic ecosystem, which forces all users through one pipe for any app download or goods purchasing done on the device - and Apple tariffs suppliers 30% of the entire transaction - while disallowing them from raising their prices respective of what they sell for off the device to compensate for profit margins that might not even be that high.
    They also force carriers to subsidize more of the cost of the iPhone than other smartphone manufacturers do - which raises the monthly bill for EVERYONE, as those carriers must absorb that cost. Thanks, Apple.

    To be frank - it's rape, on top of rape, on top of rape, with Apple being the rapist, and really everyone in any transaction chain right down to the end user bending over and taking it... and even impacting non-Apple users, while their profits soar right past $130B (that's BILLION) in the bank as a result.

    Apple isn't undercutting ANYONE.
    geolemon