The one country Apple can't crack: China

Apple comfortably leads most global mobile markets with its popular iPhone. In China, however, it's only seventh. A lesson in localization.
Written by Andrew Nusca, Contributor on

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?

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