Apple's Fresh Push into China With New Shanghai Store

David Barboza

Although Apple is widely admired in China, most fans of its products here have been buying their iPhones, iPods and Mac computers from smugglers who operate through underground electronics markets.

Apple Store
Flickr: hairygrumpy

The company, which has been slow to cultivate the Chinese market, has relatively few sales outlets in the country and only one Apple Store — a modest branch in Beijing.
But with Apple set to open a flagship showroom on Saturday in Shanghai — one of its largest stores in Asia — the company is making a new push to tap into the world’s biggest mobile phone market and grab a bigger share of China’s fast-growing consumer electronics business.

Success is far from guaranteed, because the company will be going up against big, entrenched competitors in both the personal computer and mobile phone markets. And its newest, hottest products — the iPad and the iPhone 4 — are not yet available in China, and the company has not announced when they will be.

Apple intends to open 25 retail stores in China over the next two years, starting with the 16,000-square-foot Shanghai outlet that it previewed for reporters on Thursday.

“We view this store as a kind of launching pad,” Ron Johnson, a senior vice president based in California and the head of Apple’s retail operations, said at the preview.

By opening retail outlets in China, Apple is following other global brands eager to market to the growing numbers of increasingly affluent consumers in this country of 1.3 billion people. With retail sales booming in China this year, companies like Best Buy, the Gap, Nike, Starbucks, Zara and most of Europe’s big luxury goods makers are opening stores in China.

Analysts who follow Apple say that China is a potentially huge opportunity for the company because its market share here is tiny — less than 5 percent in big categories like personal computers, music players and mobile phones. But it has been adding authorized Apple dealers in China — expanding those ranks by about 800 in this year’s first quarter, bringing the total to around 2,000 locations.

“Apple plans a major invasion of China over the next 18 months to two years,” said Charles Wolf, an analyst who follows Apple for Needham & Company and credits its retail stores with significantly bolstering Apple’s brand. “To date, Apple has not been a force in China. But it will be.”

Still, other analysts say Apple faces significant hurdles. The challenges of finding Chinese partners has tended to delay product releases. China’s mobile phone market, for example, is tightly regulated and state-owned companies control service contracts.

And sales through official distributors have been weakened by prices that are substantially higher than in the United States (about $864 upfront for the 3GS model with a complicated calling plan requirement of a two-year commitment that involves an additional monthly fee), driving a brisk underground trade in smuggled goods.

The iPhone was not officially released in China until late last year, nearly two years after its introduction in the United States because of what analysts say were long-running negotiations with state-run telecom companies, and restrictions on what kinds of services could be offered.

By then, analysts say, more than one million iPhones had been brought into the country by tourists or smugglers and unlocked by Chinese hackers, enabling use without a long-term contract.

Apple also faces stiff competition from Nokia, Motorola, HTC and other mobile phone brands that use Google’s Android operating system. Those companies have been aggressively marketing their products in China, which has more than 650 million mobile phone users.

Even Lenovo, the Chinese computer maker, has entered the smartphone market by introducing what it calls the LePhone, which is priced at about $400, far below the iPhone in China.

In an interview published in The Financial Times on Monday, Liu Chuanzhi, the head of Lenovo, said Apple was missing a huge opportunity in the Chinese market because the company was spending too little time serving Chinese consumers and understanding their needs.

Apple declined to comment on the Lenovo statements. But Apple executives say they hope that building stores in China will give the company more direct contact with its consumers and duplicate the excitement Apple has generated elsewhere. If Apple opens 25 stores by 2012, analysts say China would very likely become the company’s third-largest market.

Retail stores could also aid Apple’s partner here, China Unicom, a state-owned telecom company that has an exclusive multiyear deal to sell the iPhone in China.

Analysts estimate that China Unicom has sold about one million iPhones since late last year. They say the company had expected to sell far more by now but that the high price of the iPhone has prevented stronger sales.

“The price of the official iPhones is too high compared to that on the gray market,” said Sandy Shen, an analyst at Gartner, the research firm based in Stamford, Conn. “Also, Apple has too few retail stores in China. It is inconvenient for consumers to find one when they want to buy the iPhone, iPod or Mac.”

China Unicom trimmed $147 from the iPhone plan, and analysts say that sales have picked up.

Black market merchants say that even with new Apple stores, they have an advantage.

“They won’t have any impact on our clients,” Yang Zijie, an unauthorized vendor selling smuggled Apple products, said Thursday at an electronics market in Shanghai. “Their price for the iPhone 3GS is much higher. Customers who already got used to the price of smuggled goods won’t turn to them. And they don’t have the iPhone 4 or the iPad at all.”

But many analysts predict that consumers will flock to Apple stores. Apple products are widely and even comically imitated in China — there’s the iPed, iRobot, iOrgane and aPad — and the large number of actual Apple phones smuggled into the country is an indication of pent-up demand.

Apple should get a better sense of that demand on Saturday, when the Shanghai flagship store is set to open in a fashionable mall in the Pudong financial district near some of the city’s gleaming new skyscrapers.

The shop is designed in Apple’s sleek, minimalist style and punctuated by a 40-foot-tall cylindrical glass shell that echoes the company’s glass cube on Fifth Avenue in New York.

The store has about 175 workers. Customers enter through a winding staircase that takes them into an underground area that sells computers, smartphones and accessories. It is outfitted with the company’s usual Genius Bar, where customers can get technical support, as well as a “briefing room” intended for business seminars.

On Thursday, Mr. Johnson was beaming as he introduced the store’s features to about 100 Chinese journalists, saying the shop offered “all the hallmarks of an Apple store experience plus a couple more.”

At the end of his briefing, even the reporters seemed to have been pulled in by Apple’s aura, breaking into loud applause.

- Bao Beibei contributed research.