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Apple Looks to China’s ‘Staggering Potential’

Kathrin Hille in Beijing and Chris Nuttall in San Francisco

If Apple needed an illustration of its popularity in the world’s biggest smartphone market by volume, it was given one this month in Beijing.

People queue to buy iPad 2 at an Apple store on May 6, 2011 in Shanghai, China.
Getty Images

The U.S. group suspended sales of all iPhone models through its retail stores in China after the launch of its latest model — the 4S — at its flagship Sanlitun store in Beijing triggered a riot among black marketeers.

Such hysteria is an extreme example of the attraction of a device that drove Apple to its best quarter in its 35-year history, far outstripping analysts’ expectations. It further surprised investors with its optimism for 2012, suggesting its phenomenal growth was set to continue.

It cast aside its usual caution and forecast revenues and profits for the current quarter — $32.5 billion and $8.50 per share — that for once bettered Wall Street’s predictions. Some of that optimism comes from the success it has had tapping new markets, including China.

The iPhone 4S is now in 90 countries, its fastest rollout ever – and the company now earns 58 percent of its revenues outside the U.S. This means the rest of the world will come more into play and could lead growth this year.

Tim Cook, Apple chief executive, on Tuesday picked out China as having the most potential for growth. He told an analyst conference call that Apple was making some progress in Brazil, Russia and India, but China, among the Bric countries, was on a different level, with demand “staggering” and “off the charts”.

But Apple may have a hard time fulfilling that demand. Its store in Sanlitun, an upscale Beijing shopping district, was one of the destinations of choice as thousands of Chinese youngsters headed out on Wednesday to spend some of the money they received from parents and grandparents for the Lunar New Year festival.

As usual, all spots at the long tables were taken, with children playing games on MacBooks and iPads as their extended family looked over their shoulders. But one of the main objects of customers’ desire, the iPhone, was nowhere to be seen following the suspension of sales earlier this month.

Customers kept asking for the phones at the store on Wednesday, but sales staff had little comfort to offer. They advised consumers that they could order the iPhone 4S in Apple’s online store but it was out of stock now and there was no indication how long they would have to wait for the device.

Customers are also being directed to China Unicom, the only Chinese carrier which offers subsidized iPhones bundled with contracts. “Otherwise you may want to try at Buynow [an electronics mall in Beijing] but you will probably have to pay a mark-up of Rmb1,000 at least,” said one sales employee at the store.

Keeping supply scarce has been part of Apple’s strategy in China, and in the past helped fan the flames of consumers’ desire.

But, more recently, the hype has not been enough to keep Apple ahead of key competitors in the Chinese market and it seems to have genuine shortages now, with the company admitting to a significant order backlog due to high demand.

While Apple’s share of the Chinese smartphone market more than doubled over the past two years, Samsung managed to grow its piece of the pie more than fourfold during the same period, and in the third quarter of 2011, Apple fell behind both Samsung and Huawei, the Chinese telecoms equipment maker.

This happened just as growth in the Chinese market gained momentum: China overtook the U.S. as the world’s largest smartphone market with 23.9 million devices shipped in the third quarter last year, almost 60 per cent up from a quarter earlier, according to Strategy Analytics.

Analysts say Apple’s main problem is the lack of other operator partnerships beyond China Unicom. The company is China’s second-largest mobile carrier by subscribers, with just under 200m, compared with the 650m subscribers at China Mobile, the market leader.

Apple has been in talks with China Mobile about a possible iPhone carrier deal for years. But the operator’s third-generation network runs on the country’s homegrown TD-SCDMA standard, which would require custom tweaks to the device, something Apple is reluctant to do.

The two companies are expected to aim at a deal for an LTE-compatible iPhone. But since commercial services in LTE in China are not expected until next year at the earliest, Chinese Apple fans may be facing another long wait for more affordable iPhones.

Clearly Apple is right in seeing China as a huge potential market for the iPhone, but unlike in the rest of the world, its execution skills there are for once being questioned.

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