If imitation really is the highest form of flattery, Steve Jobs has reason to be pleased.
Last month an American blogger posted a series of photos of an electronics store in Kunming that – from a distance – looked just like one of Apple’s full-service outlets. It mimicked the Apple decor perfectly and offered the full range of company products for sale.
The problem? Apple doesn’t have a store in Kunming. As it turns out, there were as many as 22 fake Apple stores in the same city, says Xinhua. And they had done their job so convincingly that even employees at the outlets were duped. Most were shocked to learn that they weren’t actually working for the Cupertino-based company.
“China has taken rip-offs to a new level, pirating Apple Stores themselves. It speaks to the demand for Apple products throughout China,” Charles Wolf, an analyst for Needham & Company, told the New York Times.
How popular is Apple in China?
In July, it reported blockbuster sales for its third quarter, including $3.8 billion in revenue from Greater China, which includes Taiwan and Hong Kong.
That is a massive 600% increase on a year ago.
“China was very key to our results,” Tim Cook, the company’s new CEO, acknowledged on the earnings call, adding that the company had made $8.8 billion cumulatively in Greater China revenues in the first three quarters of its fiscal year.
To help put that into perspective, Baidu, the largest internet company by revenues in China, is forecasting sales of about $4 billion for full year 2012.
More impressively, Apple’s China sales have now overtaken those of Lenovo, the largest domestic PC maker. Lenovo, which acquired IBM’s personal computer business in 2004, announced last week that revenues in China rose 23.4% from a year ago to $2.8 billion, the Financial Times reported. Although that figure does not include Hong Kong and Taiwan, Jenny Lai, head of Taiwan research at HSBC, says sales in those two markets “would not be enough to make up the $1 billion gap”.
Apple also says that its fully-owned outlets in China — still only two in Beijing and two in Shanghai — are now the most visited Apple stores in the world. They also generate the most revenue, outselling even the Fifth Avenue store in Manhattan.
Given how many American brands have tried but failed to crack the elusive China market, Apple’s success is a huge achievement.
But what’s ironic is the view that the company has succeeded in China without really trying.
While other multinationals have deployed huge financial and management resources in hope of making commercial inroads, Apple started its own expansion push only last year.
Nor have there been many of the high-profile China visits from top executives to secure government support. There is no record of Jobs ever visiting the country. Cook may have visited in June, although Apple declined to comment. Hardly the ‘China is our future’ tub-thumping of many of his peer group…
Apple’s push into China also came relatively late. Hewlett-Packard, Dell, Nokia, Samsung and Motorola have been chasing China’s booming mobile and PC markets for much longer. Homegrown telecoms equipment makers like ZTE and Huawei had also started up, experiencing enormous success selling low-end handsets. All the while, Apple’s price points were significantly higher than the market average (in the mobile phone category, for example, a $100 Nokia).
Apple’s China strategy also seemed like something of an afterthought. It didn’t launch the iPhone 3G model in China for a full 28 months after it had been introduced in the US, for instance. Customer response was said to be lukewarm (although more than 2 million units had already been sold in the thriving grey market; see WiC36). China Unicom, Apple’s exclusive carrier, ended up cutting prices to jumpstart sales.
CNBeta, a domestic tech blog, called the iPhone-maker “arrogant”.
Then Apple started shortening the time between introducing its devices in the US and their sale in China. The iPhone 4 was in mainland Chinese shops about three months after its introduction in the US and the iPad 2 was launched shortly after it became available worldwide.
Was that a change of heart from Apple strategists? In an interview with the FT last year, Liu Chuanzhi, Lenovo’s founder and chairman, crowed that Apple was fluffing the China market.
“We are lucky because Steve Jobs has such a bad temper and doesn’t care about China,” Liu said. “If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble.”
However, as we chronicled back in WiC89, Apple was beginning to show that it cared about its China business very much. Bad temper or not, Jobs was training his sights on on the burgeoning Chinese market.
So, part of the Jobs’ masterplan?
Some analysts think so. Paul Denlinger at the blog China Tracker reckons Apple’s growth shows Jobs’ uncompromising perfectionism has paid off.
Instead of introducing cheaper (and, implicitly, inferior) products for the China market, Apple chose to wait until disposable incomes had risen to levels where consumers could afford their products.
Paul French of Shanghai-based Access Asia agrees: “There is now enough of an urban middle class with enough money to afford Apple products. Five years ago — or even two or three years ago — there weren’t enough of those people”.
Now Apple is starting to cash in. Analysts say the company is in talks with the country’s two other big telecom operators, China Telecom and China Mobile (the biggest player of all) to offer the iPhone.
Wang Jianzhou, China Mobile’s chairman, confirmed to Communications World Weekly that he had met with Apple executives to discuss the prospect of selling the iPhone. (The rumour is that this was why Cook travelled to China in June.)
“All I can say is, it’s a common wish of China Mobile and Apple to come to an agreement as soon as possible,” Wang told newspapers.
One question is whether Apple will offer the device on China Mobile’s homegrown 3G technology, TD-SCDMA, or wait until the carrier has rolled out a fourth-generation network called TD-LTE, which it has been testing in select cities (see WiC60). But with around 616 million subscribers, China Mobile would have the distribution and marketing reach to drive Apple sales to much higher levels.
What about competition?
Lenovo hasn’t given up on the battle. The domestic PC champion is aiming to challenge the iPad’s dominance of the tablet market with its own family of devices designed to appeal to a broader audience.
Nor is it surrendering on smartphones, saying it is looking to compete against the Californian tech giant at lower prices.
“Apple only covers the top tier,” insists Yang Yuanquing, Lenovo chief executive. “With a $500 price you cannot go to the small cities, townships, low-salary and low-income class. I don’t want to say we want to significantly lower the price. Rather our strategy is to provide more categories, to cover different market segments.”
A new Apple a day…?
Apple mania is also inspiring other grassroots competition, with companies keen to grab a chunk of its success.
One domestic start-up, Xiaomi, has been grabbing headlines this month by debuting a smartphone that it says is much cheaper than the iPhone (at Rmb1,999, it costs less than half) but also the world’s fastest too (1.5-gigahertz, compared to the iPhone’s 1-gigahertz).
The technical reviews have been pretty favourable although analysts say Xiaomi will have to compete with the launch of the iPhone 5, which is said to be imminent. It comes packaged with a series of its own applications run on Google’s Android-based operating system.
“For the same reason that Google bought Motorola Mobility, a company must be involved with software, hardware and services in order to compete,” says Lei Jun, chief executive at Xiaomi.
But it seems that it is Apple that remains very much Lei’s inspiration.
Dressed in a short-sleeved black polo shirt and jeans, Lei unveiled his new product with a presentation that came close to cloning of one of Jobs’ classic keynote speeches.
Bar the fact that Lei looks like he’s barely out of university (see photo), the similarities are unmistakable.
With news breaking yesterday that Jobs will stand down as Apple’s chief executive, perhaps Lei can take on the role of keeping his spirit burning further afield…
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.