How to win in China without trying

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16 Dec 2011
Week in China

It was a case of being conned in Kunming, state newspaper Xinhua reported in August this year, on revelations that as many as 22 fake Apple stores were active in the city.

Some of the outlets were said to have been so convincing that even their employees had been duped.

"China was very key to our results," new [Apple] chief executive Tim Cook announced at the time. He added ebulliently: "China – the sky's the limit there!"

Shortly afterwards, at least 100,000 shoppers passed through Apple's third store in Shanghai (this time a real one) in its first weekend after opening. And Apple's wider popularity is also starting to show up in its sales numbers, with Greater China revenues up 600% for the third quarter of its current fiscal year on a year ago, to $3.8 billion.

"China was very key to our results," new chief executive Tim Cook announced at the time. He added ebulliently: "China – the sky's the limit there!"

So how has Apple cracked the China market? Far from rushing into the fray, Apple bosses seem to have taken their time. In fact, one interpretation is that the genius of their China strategy – until relatively recently – was that they didn't really have one...

Slow to arrive on the scene...

Apple's interests in China have long related more to the country's role as an assembler of its products than as a marketplace for them.

That meant that its most important relationship on the ground in China was with Taiwanese giant Foxconn, which employs tens of thousands of workers to put together iPads, iPhones and MacBooks for sale overseas.

If anything, Apple bosses seem to have wanted to hold China at arms length – especially in design and brand terms. A glance at the back of its products makes the point – "Designed by Apple in California. Assembled in China" – and a similar sense of distance also seemed evident in the pace of its commercial roll out, with just five self-owned stores today (albeit with more authorised resellers also selling Apple products).

No wonder, say critics, that so many knock-off merchants were setting up shop in places like Kunming. Apple didn't seem too bothered about establishing a distribution network of its own, because it failed to grasp China's commercial potential, the naysayers added.

Backing that up were complaints that it was too hesitant in launching its new products to Chinese consumers, with the iPhone3 not on offer until October 2009, more than two years after its release in the United States.

Could this have been a deliberate tactic designed to stem the counterfeiting ambitions of Chinese copycats? If so, there were signs that the mood was starting to change by the middle of last year. The iPad got to China five months after sales had started in the US, for instance, and the iPhone 4 was only three months in arrears.

But revelations from a US embassy cable from September 2008 (exposed by Wikileaks) still hinted at a strange lack of China focus. Until recently, there had been little obvious attempt to register Apple trademarks in the country, embassy officials reported. More recently this issue came home to roost when Taiwanese firm Proview won a lawsuit in China, establishing its claim to own the rights to the name IPAD in the country. As the Daily Telegraph points out this ruling has major consequences: "Apple may have to change iPad's name in China".

This laissez-faire approach to the world's most populous country is a little difficult to reconcile with the reputation for control freakery often said to emanate from company headquarters in Cupertino. And more widely, Apple's perceived indifference to the China market also drew comment from rivals, including remarks from Lenovo founder Liu Chuanzhi.

"We are lucky because Steve Jobs has such a bad temper and doesn't care about China," Liu told the Financial Times in 2010. "If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble."

Wasn't this about market timing?

Fans of Apple in China think so, seeing the delay as a deliberate ploy.

The theory is two-fold. First, that Apple was benefitting from the buzz building up around the stream of unofficial imports entering the country, often via Hong Kong. The suggestion is that the Apple brand was building unstoppable momentum, helped by the scarcity value of its products. Sure, cash flow was yet to boom. But Apple cachet was growing by the week.

Apple also knew that time was on its side. It was ready to hold off before making a bigger commercial splash, rather than dilute its brand with cheaper iterations of its products. Instead bosses chose to wait for more Chinese to reach income levels capable of supporting a massive sales push.

There is now enough of an urban middle class with enough money to afford Apple products.

By April this year there was no need to delay any longer, says Paul French, retail analyst at Access Asia, as there were millions of new consumers desperate to buy into the brand.

"There is now enough of an urban middle class with enough money to afford Apple products," French noted. "Five years ago – or even two or three years ago – there weren't enough of those people."

And on Apple's own terms, too...

Another theme in Apple's China success story is that it has done things largely its own way. The context here is that most of the foreign firms to enter the Chinese market have had to strike deals, either in setting up ventures that have traded intellectual property or equity for local access, or in developing product ranges tailored more specifically to local tastes.

Apple seems to have given up less ground to its local partners. Certainly, it doesn't appear to have been interested in tailoring its product for a local audience (although it did drop Wi-Fi functionality on models sold via its China Unicom tie-up, apparently at the request of the Chinese authorities).

But, deliberately, there is no locally-rejigged ‘Chinese version' of the iPad or iPhone – instead purchasers get a design intended to appeal to a universal aesthetic. Apple's fans in China seem to like that, putting the brand very much into the luxury goods category.

The second take on Apple's stubbornness relates to its business model, and how it works with its local partners. "Everything basically that we're doing in the United States, we're doing in China," Tim Cook told reporters this summer. Again, the premise is of a company following its own path.

The most obvious example is in China Mobile's failure to convince Apple to become its domestic partner. Despite the lure of a 600-million plus subscriber base, Apple went with much smaller China Unicom instead.

Even here there were rumours of Apple getting its way in disagreements on pricing, as well as Unicom's desire for a greater say in the running of Apple's operations locally.

And the folklore of Apple doing things its own way persists, with Steve Jobs never even travelling to China (although Tim Cook has visited). That all came as something of a shock to the Chinese telcos, which have grown used to foreign firms beating a path to their door, says Paul Denlinger, an industry analyst.

A rebel without a cause?

Still, there are other areas in which Apple has made more of an effort to adapt to the Chinese environment.

Take the Apple brand in North America, and later in Europe, where Jobs initially painted the company as the rebel or underdog. Fans bought into its ethos as challenger to the established order, and the epitome of youthful brashness and cool.

One exhibit is the fabled 1984 commercial that introduced the Macintosh for the first time. Directed by Ridley Scott, the scene is iconoclastic, portraying the sledgehammer destruction of a Big Brother-like propaganda event.

Another example is the Think Different advertising campaign of 13 years later, which also celebrated the renegade culture.

"Here's to the crazy ones, the misfits, the rebels and the troublemakers...they're not fond of the rules, and they have no respect for the status quo," the voiceover runs.

That's not a message designed to strike much of a chord with the Chinese authorities, of course. Nor, indeed, has rebelliousness been given much emphasis in appealing to Chinese customers, Christina Larson pointed out to Foreign Policy this summer. Instead, Apple's luxury appeal has been much more prominent in attracting followers.

Apple's luxury appeal has been much more prominent in attracting
followers.

Apple's evolution into a leading global brand has made it difficult to maintain its early rebel appeal. But in China it seems to have been dispensed with at the outset. As HSBC analysts Tucker Grinnan and Neal Anderson point out, what's much more important is the status conferred by owning an Apple product, even when convenience is at stake. Why else, they ask, would 10 million China Mobile subscribers be operating ‘jailbroken' iPhones on a 2G network, with all the loss of functionality that this implies?

The follow-up question is how Apple's collaboration with China Unicom will evolve in future, with signs that the Chinese carrier is disappointed that the iPhone has not dislodged a greater share of higher-value customers from China Mobile, its larger rival.

As a result, Unicom looks like it could be switching strategy, with a recent focus on the sales success of the ZTE V880 and the Lenovo A60.

Both are Chinese-designed handsets aimed at customers who will struggle to meet the iPhone's asking price, say Grinnan and Anderson, who see lots of opportunity for smart phones priced below Rmb1,000 ($150). The advantage is that these users will often be younger, more net-savvy and probably more likely to want data services.

"Apple only covers the top tier," Yang Yuanqing, Lenovo's chief executive, warned last year. "With a $500 price you cannot go to the small cities, and the low income class."

How will Apple address that market? One approach would be to turn back towards China Mobile and its vast subscriber base. But there are problems here with the reliability of China Mobile's 3G network, which is being built on a proprietary design intended to foster a homegrown standard. To date, China Mobile has also been unable to steer Apple towards an iPhone compatible with the TD-SCDMA format (although there is persistent speculation that this might change).

Or might Apple look at a new generation of products designed to be more affordable for a wider audience? Something like a mini iPad, perhaps (assuming Apple can still use that name)? Apple has created new categories before, and more time spent with Chinese consumers may well lead it to do the same again.

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