Apple struggles to take bigger bite out of China

Written by Reuters | Hong Kong | Updated: Dec 17 2011, 07:06am hrs
Apples share of Chinas booming smartphone market has risen sharply in the past two years, but for now the company that sells the iconic iPhone is being outpaced by nimble rivals.

It is not that Apples iPhones and iPads are losing favour among Chinese consumers. The iconic products are flying off the shelves at Apples five flagship stores in Shanghai and Beijing, unauthorised sellers, and even from fake shops dressed up to look eerily like the real thing.

The problem facing Apple seems to be timing.

Network technology is not sufficient to fully support iPhone and iPad capabilities, while other handset makers supply phones that support the various mobile standards used in China.

A tie-up with another telecom service provider would help catapult Apple sales. But the biggest by far, China Mobile with more than 600 million subscribers, may not have matching technology in place commercially until late 2012 or 2013. Apples relatively rigid global pricing structure and limited range of models are allowing more flexible competitors to grab market share at a faster pace.

Apples smartphone market share has more than doubled since the first quarter of 2010, but others are doing better. Samsung Electronics market share has more than quadrupled over the same period.

Apples strategy in China is to capture the higher-end segment, which is a big enough market for it to tackle, said Jane Wang, an analyst at UK research firm Ovum.

It has cut prices of some of its products, which will definitely be more affordable for some budget-conscious consumers, but its only going to go so far in lowering prices.

China has more than 950 million mobile phone users, more than Europes entire population, and its economy is expected by many to overtake the United States as the worlds largest in 10 to 15 years.

Although Apple makes laptops, desktops and iPods, it generated about half its sales from iPhones in the fourth quarter, making the product key to success in China.

The US technology giants sales in Greater China mainland China, Hong Kong and Taiwan have been skyrocketing. Fourth-quarter revenue increased four-fold to $4.5 billion, out of a global total of $28 billion.

Demand is so strong in China that smuggling of real iPhones and sales of fakes are on the rise. Copy-cat stores masquerading as real Apple outlets and selling genuine Apple products have sprouted up everywhere from Beijing in the northeast to Kunming in the southwest.

The relatively high price of iPhones is a major deterrent, giving market inroads to rivals such as Samsung and local rivals Huawei Technologies and ZTE, analysts said.

Chinese consumers can typically buy a smartphone from other brands at below 2,000 yuan. A basic iPhone 4 costs double that 3,988 yuan in China. Apple is selling its lower-end iPhone 3GS at 2,888 yuan, which will likely draw some budget-conscious consumers. But it has not been enough.

In the third quarter, Huawei overtook Apple as the No.3 smartphone vendor in China.

Apple now trails Nokia, Samsung and Huawei, which all have a wider range of products targetting various segments of customers.

In fact, Apples smartphone market share shrank to 10.4% in the third quarter from 13.3% in the previous quarter. Samsungs shot up to 19.2% from 14.6% and Huawei to 11% from 7.3%.

Nokia, the market leader, is fast-losing traction. It holds top slot with 26.8% share but that has dropped from 36.2% in the previous quarter and 71.4% a year earlier.

At the end of the day, Apple will only go so far to lower the pricing because if they go too low, its going to damage their iconic brand, said Michael Clendenin, managing director at China-focussed technology advisory firm RedTech Advisors in Shanghai.

The real missing link in Apples approach to China is a tie-up with China Mobile, the countrys top mobile carrier by far, analysts said. Apples current partner, China Unicom, is a distant second with 192.4 million mobile subscribers. So far negotiations with China Mobile and fixed-line giant China Telecom, which also has a mobile network with 120 million subscribers, have been protracted.

The main sticking point has been the terms of the agreements, which could range from revenue sharing that would allow both parties to split money from data charges to simple bulk purchases.

However, even with another partner, Apple must contend with another barrier Chinas slow uptake of 3G technology. Only about a tenth of Chinas almost 1 billion mobile phone subscribers use 3G. Most users make phone calls and send text messages.

The best immediate option for Apple may be China Telecom, which uses a CDMA technology that the iPhone can use.