July 22, 2008

Apple Still Struggling to Win Fans in China

Yang Weiguo, a 20-year-old university student in Beijing, is a committed Apple (AAPL) fan. Given the American company's limited presence in China, that's no small achievement. In April, for instance, Yang bought a new Macbook through MacX.cn, a fan site for Mac users in China that operates an online store unaffiliated with the company. The online store had someone buy a computer for Yang in Hong Kong and courier it up to Beijing, saving him $293, or roughly 17%, on his Macbook purchase.

So when Yang, who is spending his summer as a volunteer for the Olympics next month, found out through the Mac community that Apple would open its first store in China on July 19, he knew he had to be there from the beginning. He arrived at the shop, located in a swank shopping mall in the Sanlitun area of Beijing, 22 hours before it was scheduled to open. He was among more than 100 others who camped overnight -- even though he already had his Macbook and wasn't interested in a new iPod. "I don't have anything I need to buy," he says. Still, because he wanted to be there, Yang spent $26 for an adapter cable he could have easily purchased elsewhere.

Smuggling Challenge

Apple executives want to make it easier to convert more people like Yang from the cult of Mao to the cult of Mac. Apple plans to open a second store in Beijing in 2009 and another in Shanghai later. "We expect to be successful here in China because the entire economy is growing," says Ron Johnson, Apple's senior vice-president for retail.

The company has a long way to go. While Apple dominates the digital music player market in the U.S., it sold only 700,000 iPods in China last year, accounting for just 7.5% of the country's MP3 player market. [Smugglers brought in a further 300,000, according to market researcher IDC.] And that's the good news -- the company's market position for Macs is much worse. Last year, Apple sold a mere 65,000 Macs in China, earning it a measly 0.18% of the country's computer market share, says IDC. The iPhone is not sold legally in China [BusinessWeek.com, 12/13/07], but market research firm In-Stat China estimates that 400,000 iPhones had made their way to China, accounting for 0.07% of the world's largest cell-phone market, by the end of 2007.

Among Apple's three core products [the iPod, the iPhone, and the Mac], the iPod accounts for four-fifths of Apple's revenues in China, estimates Bryan Yuan, an IDC senior research analyst. Apple has been quietly laying the groundwork for the eventual sale of the iPhone in China, which could one day overtake iPod sales, given the ubiquity of cell phones in China. Apple and China Mobile, the country's largest cell-phone carrier, recently restarted negotiations to bring the iPhone to China [BusinessWeek.com, 01/14/08] after Apple dropped its demand to share profits with telecom operators.

New Retail Strategy

One obstacle for Apple's China sales has been the company's approach to retail. For years it sold iPods and Macs through an authorized distributor network in China's IT malls, shopping centers where most consumers traditionally would buy their electronics equipment. Starting last year, Apple began revamping its retail strategy in China by signing deals to sell through nationwide home appliance chains such as Suning Appliance and GOME Electrical Appliance. Apple also hired senior executives from Motorola (MOT), who have leveraged their connections in industry to get cell-phone retailers to sell iPods.

Not everyone is sure Apple's newest retail strategy will make much of an impact. "Apple opening its own store will help raise brand awareness, but it's hard to say if that will translate to an increase in actual sales," says Antonio Wang, research manager at IDC China.

The big problem for the American company is the price sensitivity of the market. While some Chinese like the Mac's clean design and its reputation for being relatively free of viruses, that doesn't necessarily mean they have bought the computers. Wang Yanmin, a 26-year-old from the northeastern city of Changchun, helps manage a Mac fan site, kenapple.com, even though he has never owned a Mac himself. Since the unemployed Wang cannot afford to buy one, he installed the Mac operating system on his PC instead. Earlier this year he opened his own store do the same for other PC owners, but closed it after two months because of lack of business. "The price of an Apple is not something most people in China can accept," says Wang.

Pricey Products

The Apple products sold in China are generally more expensive than what American consumers pay. For example, a white 2.4 GHz Intel Core Duo MacBook at the new Apple store in Beijing retails for $2,000, or nearly what the average urban Chinese worker earned in 2007. By comparison, Americans can buy the same product for $1,300 from Apple online. Apple's Johnson doesn't think the company has a problem, though. He says Apple sets its prices in China based on what's the right price in the market. "The last I heard, there are 3.3 million people who own a car in Beijing," he says. "If you can afford a car, I think you can afford an iPod or a Mac."

In many ways, China is unlike other foreign countries Apple has entered. It's the only developing country where Apple has its own retail store; the other countries outside the U.S. where Apple has opened stores are Australia, Britain, Canada, Italy, and Japan. "In the global Mac community, if you come from someplace that has an Apple store, there's something in you that makes you feel I come from an Apple country," says David Feng, executive president of BeiMac Union, a Beijing-based Mac user community. "And there's a bit of a sense of pride that this gives you."

Pirated Music Files

China also is the only country where Apple has a brick-and-mortar store but not a local edition of its iTunes online music store. Apple's Johnson declined to comment on why Apple does not have a Chinese version of iTunes. Analysts say it is most likely due to concerns about piracy. The International Federation of the Phonographic Industry estimates that more than 99% of all music files distributed in China are pirated. "Apple should probably get more involved in finding a solution to the problem too, via iTunes or other means, as after all, that's the primary use of the iPod in China, isn't it?" says Matthew Daniel, vice-president for strategic development at R2G, a Beijingdigital music distribution company.

Other companies have tried. In 2005, Beijing's Aigo, which sells MP4 players and portable storage drives, became the first Chinese company to open an online music store for Chinese consumers to download music legally. Feng Jun, Aigo's founder and president, admits his AigoMusic store is still losing money, but he believes that legal music downloading will win acceptance as Beijing continues to crack down on intellectual property violations. "We are a startup company, and we were able to invest in an online music store," he says. "Apple could easily afford to also. It would not be a big investment for them to come out with a Chinese version of iTunes."