Apple Struggles to Win Fans in China

Tag : ipod hong kong

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

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

Smuggling Challenge
Apple executives want to make it easier to convert more people likeYang from the cult of Mao to the cult of Mac. Apple plans to open asecond store in Beijing in 2009 and another in Shanghai later. "Weexpect to be successful here in China because the entire economy isgrowing," says Ron Johnson, Apple's senior vice-president forretail.

The company has a long way to go. While Apple dominates the digitalmusic player market in the U.S., it sold only 700,000 iPods inChina last year, accounting for just 7.5% of the country's MP3player market. [Smugglers brought in a further 300,000, accordingto market researcher IDC.] And that's the good news -- thecompany's market position for Macs is much worse. Last year, Applesold a mere 65,000 Macs in China, earning it a measly 0.18% of thecountry's computer market share, says IDC. The iPhone is not soldlegally in China [BusinessWeek.com, 12/13/07], but market researchfirm In-Stat China estimates that 400,000 iPhones had made theirway to China, accounting for 0.07% of the world's largestcell-phone market, by the end of 2007.

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

New Retail Strategy
One obstacle for Apple's China sales has been the company'sapproach to retail. For years it sold iPods and Macs through anauthorized distributor network in China's IT malls, shoppingcenters where most consumers traditionally would buy theirelectronics equipment. Starting last year, Apple began revampingits retail strategy in China by signing deals to sell throughnationwide home appliance chains such as Suning Appliance and GOMEElectrical Appliance. Apple also hired senior executives fromMotorola (MOT), who have leveraged their connections in industry toget cell-phone retailers to sell iPods.

Not everyone is sure Apple's newest retail strategy will make muchof an impact. "Apple opening its own store will help raise brandawareness, but it's hard to say if that will translate to anincrease in actual sales," says Antonio Wang, research manager atIDC China.

The big problem for the American company is the price sensitivityof the market. While some Chinese like the Mac's clean design andits reputation for being relatively free of viruses, that doesn'tnecessarily mean they have bought the computers. Wang Yanmin, a26-year-old from the northeastern city of Changchun, helps manage aMac fan site, kenapple.com, even though he has never owned a Machimself. Since the unemployed Wang cannot afford to buy one, heinstalled the Mac operating system on his PC instead. Earlier thisyear he opened his own store do the same for other PC owners, butclosed it after two months because of lack of business. "The priceof an Apple is not something most people in China can accept," saysWang.

Pricey Products
The Apple products sold in China are generally more expensive thanwhat American consumers pay. For example, a white 2.4 GHz IntelCore Duo MacBook at the new Apple store in Beijing retails for$2,000, or nearly what the average urban Chinese worker earned in2007. By comparison, Americans can buy the same product for $1,300from Apple online. Apple's Johnson doesn't think the company has aproblem, though. He says Apple sets its prices in China based onwhat's the right price in the market. "The last I heard, there are3.3 million people who own a car in Beijing," he says. "If you canafford a car, I think you can afford an iPod or a Mac."

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

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

Other companies have tried. In 2005, Beijing's Aigo, which sellsMP4 players and portable storage drives, became the first Chinesecompany to open an online music store for Chinese consumers todownload music legally. Feng Jun, Aigo's founder and president,admits his AigoMusic store is still losing money, but he believesthat legal music downloading will win acceptance as Beijingcontinues to crack down on intellectual property violations. "Weare a startup company, and we were able to invest in an onlinemusic store," he says. "Apple could easily afford to also. It wouldnot be a big investment for them to come out with a Chinese versionof iTunes."