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China In Thrall to the Cult of Apple

The day the iPad 2 went on sale in China, several people in Beijing reported an apparition. “I saw Steve Jobs on the subway,” wrote a user on WeiPhone.com, an online Apple fan forum, on May 6. Others echoed her comments.

Apple's iPhone 3Gs
Jack Guez | AFP | Getty Images
Apple's iPhone 3Gs

The vision is a telling sign of the cult status Apple has achieved in China, already the world’s largest handset market and set to become the world’s largest PC market this year.

While long queues at Apple stores are common in the US, the latest product launch in China triggered a brawl among customers in Beijing. Apple’s four stores in China are the busiest and have the highest revenue on average among all Apple stores worldwide.

“The desire for this brand has already broadened out from the trendy urban demographic to just about everyone,” says Chiang Jeong-wen, a professor at China Europe International Business School in Shanghai who frequently uses Apple case studies in his marketing classes.

Particularly since the iPad came to market, Apple gadgets have become key items used to bribe officials or business partners. “I give away 20 iPads in a good month,” says a marketing executive at a cosmetics company who has the trunk of his car filled with iPads and iPhones when he travels to north-east China to get his company’s product on retailers’ shelves.

Apple is seeing the results. In the June quarter, the company’s revenues in China, Hong Kong and Taiwan combined grew sixfold to $3.8 billion.

All this has come with relatively little effort.

While other multinationals have deployed huge financial and management resources to make inroads in China for years, the company started an expansion push only last year.

It initially intended to increase its four Chinese stores to 25 this year, but has slowed down to open bigger stores instead. The fifth, to open in Shanghai later this year, will be the company’s biggest in China.

The company has about 1,000 authorised resellers in the country but these are by far outnumbered by shops that sell Apple gadgets smuggled in from abroad. An increasing number of them have even taken to posing as official Apple stores.

There have been none of the high-profile visits of top executives which other Western companies use to secure government support and the public’s favour. There is no official record of Mr Jobs having visited the country, and the company has not confirmed a rumoured recent trip of Tim Cook, chief operating officer.

Apple sees far more growth ahead. “I firmly believe that we’re just scratching the surface right now,” Mr Cook told analysts last month, and called China an “incredible opportunity” for Apple.

Analysts agree, but stress that the company is losing a big chunk of this opportunity to others.

“Apple’s China revenues are probably almost entirely driven by device sales and not by app income,” says Prof Chiang.

Download volumes in the iPhone app store in China have jumped since last year, making it the second-largest market behind the US, according to Distimo, a Dutch research firm. But only 0.99 per cent of the Chinese downloads are paid apps, compared with 2.45 per cent in India and 6.05 per cent in Japan, Distimo said in a report in June.

Spoiled by a broad offering of free music, films, games and other software products online, Chinese consumers are reluctant to pay for downloadable content. After years of fruitless fights against the distribution of pirated content, Western companies have started accommodating and settling for lower margins in China just to get at least some piece of the pie.

But as Apple shows no sign of moving in that direction, Chinese websites offering iPhone and iPad apps for free for unlocked Apple gadgets are mushrooming.

Chinese Apple fans complain that the company’s local app store has too few China-specific apps on offer. “There are too few e-books I like, and the ones that are there can be had cheaper elsewhere,” says Zhang Ying, a university student in Tianjin.

But then, China may just be big enough to allow Apple to ignore all this.

So far, China Unicom, the country’s weakest mobile operator, is the only operator to distribute the iPhone to its subscribers. But China Telecom is expected to start offering it later this year, and Apple has also long been in talks on an iPhone deal with China Mobile , the world’s largest mobile operator.

Once all three Chinese operators offer the phone, Apple would be set for a steady stream of revenue from a mobile population of close to 1bn people. Prof Chiang says: “Just through device sales, the market will be bigger than they can swallow for years to come."

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