iPhone Falls Behind in China and Shows that Success Is More than Popularity

Quick, name a smartphone that would appeal to people with business degrees. Chances are your answer was the Apple iPhone. And why not? The device is iconic and single-handedly changed the face of an entire industry. Apple defeated Samsung in a patent battle by convincing a jury that the extremely popular products from the Korean manufacturer were basically iPhone wannabes, copying important design aspects. And yet, even though Apple reaps an estimated three quarters of mobile industry profits, the company has made relatively little headway in China, the single biggest mobile market in the world.

According to research firm HIS iSuppli, Apple had only 7.5 percent share in China during the first half of 2012. That puts it into seventh place, well after such rivals as Samsung, Nokia, and a number of domestic manufacturers. In other parts of the world, Apple would typically be first or second. What makes this particularly problematic for Apple is that China represents its best opportunity to continue into the future the massive growth it has exhibited.

Elsewhere, Apple has been able to do business as it likes and count on rapid growth of the overall smartphone market to ensure its own popularity and the ability to maintain high margins. But, as investment firms are required to say by the SEC, the past is no guarantee of future success. Any possibility of a guarantee goes out the window the moment you cross national borders and encounter a business infrastructure and consumer culture different from the ones that have made you successful. There are a number of factors in China that work against Apple’s interests:

  • Price sensitivity — Chinese consumers are, by and large, far more price sensitive than those in the U.S. and Europe. Although there are very wealthy people in China, the vast majority of the population makes much less than western workers. They simply don’t have similar levels of disposable income. For the average person in Shanghai or Beijing, an iPhone is a luxury item.
  • Subsidies are missing — Not only is there a difference in income, but in business practices by carriers. In the U.S., for example, the wireless companies such as AT&T and Verizon Wireless heavily subsidize iPhone sales. The average iPhone sells for approximately $650 and the consumer might spend between $200 and $300 for the newest models. The rest comes out of the carrier’s pocket. If the carriers don’t chip in, consumers have to spend far more than they would here.
  • Wrong technology — Perhaps most damaging is that, up until now, Apple has not produced hardware that supports the standards used by China Mobile, the 800 pound carrier gorilla in the country. Apple simply cannot sell into the biggest provider in the market.

Does that mean Apple has made a big mistake and should tailor an offering for the mainstream Chinese market? Not necessarily. CEO Tim Cook said in July that “people in the emerging markets want great products like they do in developed market,” and that Apple would “stick to our knitting and make the best products.” The company has always pursued a high-margin strategy that provides immense financial strength.

If Apple sold the same products at a much lower price in China, the press would pick up on it and customers would howl. Contrarily, if Apple created a special product for the Chinese mainstream, customers there would complain of being treated as second class consumers and people in other countries would begin to expect cheaper products as well. By staying the course, Apple avoids a no-win situation and still pulls off a 7.5 percent market share in a huge country. Sometimes, trying to win a popularity contest is exactly the wrong thing to do if you want your company to succeed.

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