Has Apple met its match in China’s smartphone makers?

October 30, 2014 by Vaughan Winterbottom

Apple’s wildly popular smartphone line-up got a reboot on 19 September when the new iPhone 6 and 6 Plus hit the shelves. The Cupertino-based company moved more than 10m handsets over its first weekend, eclipsing comparative sales figures for all iPhones before them. But not in China. What is going on?

The iPhone 6 models took time to receive approval from the country’s regulator – although some on the Chinese internet saw more sinister reasons for the pause and accused Apple of delaying the China launch in order to whip up consumer interest and bolster subsequent sales.

The phone’s release in China – which eventually took place without fanfare on 17 October – will be closely watched: Chinese smartphone manufacturers have been playing catch-up in recent years and the country’s best handsets now boast features that are (almost) comparable to Apple’s top-of-the-line products – and sell at a fraction of the cost.

If early indications are anything to go by, the sixth instalment of the iPhone series will still be a huge hit in China. Handsets smuggled into the country from Hong Kong and further afield were selling for as much as $3,200 on Taobao, a Chinese eBay equivalent. Videos from Apple Stores in the US show a disproportionate number of mainland Chinese queuing for the merchandise. According to media reports, many of these are scalpers – or huangniu, ‘golden cows’ in Chinese – who either resell the phones online or on the street, or are paid by others to wait in line. Pre-orders eventually totalled more than 4.5m units.

Analysts see Apple’s move to bigger phones as a sign that the company is looking to steal market share from the likes of Samsung, which had reaped benefits from Apple’s earlier dismissal of phones too big for the average-sized hand to fully navigate as a fad. Such phones are particularly popular in Asia.

“The iPhone 6 with a larger screen has the potential to meaningfully accelerate Apple’s growth trajectory in China during (the second half of 2014),” said Brian White, a technology analyst at Cantor Fitzgerald in a research note.

Samsung appears worried. It has moved forward the China release date for its latest Galaxy Note 4 in order to pre-empt the arrival of the iPhone 6 Plus. The phones have similar size specifications.

The iPhone 6’s prospects in China will be aided by last January’s agreement with China Mobile that sees mainland customers able to buy phones at subsidized prices on data and call plans. The deal makes a huge difference to the affordability of iPhones in the country, where average monthly GDP per capita comes in at $567 and a current generation iPhone 5s can cost over $1000 to buy over the counter.

With over 1.2bn subscribers, China Mobile is the world’s largest telecom, and Apple’s has already seen the benefits of the partnership, according to Apple CFO Luca Maesreti.

“The addition of China Mobile coupled with a great response to our more affordably priced iPhone 4S led to an all time quarterly record for iPhone sales in Greater China,” Maesreti told an earnings call in April, at which CEO Tim Cook also announced the company would triple its store presence in Greater China over the next two years.

China Mobile told the Wall Street Journal’s Lorraine Luk in March that it had added roughly one million new iPhone users in February, the month after the deal was struck.

Apple is coy about revealing actual sales figures for individual product lines, but analysts have predicted sales of the iPhone 5 series could top 17m units by the end of this year. The company will be hoping its two new models push that tally up even higher.

Of course, 17m isn’t much from a pool of over a billion potential customers. iPhone adoption in China is hampered by the country’s still-developing 4G network, though license issuances have picked up in recent months.

A more serious challenge to Apple in China is the host of Chinese smartphone start-ups that already enjoy significant market share in the country. The best selling smartphone brand in China today is neither Apple nor Samsung – it’s Xiaomi (pronounced shiao mee), a company founded four years ago that sells its products almost exclusively online.

Xiaomi, the literal meaning of which is ‘little rice,’ is not so little. It’s already the world’s 5th largest smartphone marker, capturing 5.1% of the global market for the three months to September, according to Strategic Analytics. Its market share for the same period last year was 1.8%.

On home turf Xiaomi does even better. It led smartphone shipments in the second quarter this year with 14% market share, ahead of Samsung, Lenovo and Yulong (another start-up success story) at 12% each. Apple garnered a mere 6%.

One factor in Xiaomi’s success is that it sells phones on the cheap. Its top-of-the-range Mi4 costs a mere RMB2000, or $326, and has performed well in comparisons with phones over twice the price. The company’s business model has been compared to Amazon’s Kindle strategy by its founder, Lei Jun, in that it sells hardware at near cost price and makes money on subsequent software sales.

Another factor in Xiaomi’s success is undoubtedly the uncanny resemble of much of its hardware and software to Apple’s. Physically, there are many design similarities, down to the drilled speaker holes in its flagship handpiece. Its Mi Pad has exactly the same screen size, resolution aspect ratio and colour choice as the iPad mini, according to the Cult of Android blog. And the latest version of Xiaomi’s operating system, MIUI 6, is almost a homage to Apple’s iOS.

The copycat allegations aren’t helped by the personal style of Lei Jun. The founder dresses like Steve Jobs at product releases – black shirts and blue jeans – and even stole the former Apple CEO’s hallmark phrase ‘one more thing’ at a recent presentation.

Famously lawsuit-friendly Apple hasn’t taken action against Xiaomi – suing a Chinese company in China would most likely be a frivolous task. But should Apple be worried that sales of its latest iPhone will suffer at the hands of its Chinese twin?

In China, at least, the companies are competing for different markets. Fully 41% of Xiaomi’s customers in the first half of this year were first-time smartphone buyers, according to Techcrunch. Apple’s market is mature consumers, many of whom see the iPhone’s hefty price tag as a status symbol.

Xiaomi poses more of a threat to lower-end Samsung sales. Indeed, nearly a quarter of those who bought Xiaomi phones in the first six months of 2014 were Samsung switchers.

What may worry Apple in the long-term, however, are Xiaomi’s plans to go abroad. The company hired former Android vice president Hugo Barra last year for the purpose of expanding overseas, a move that made waves in the tech community.

Xiaomi already sells online in a number of developing countries in the Asia Pacific and South America. Developed market consumers may eventually be swayed by rock-bottom prices and specs that come very close to Apple’s flagship phones.

Still, key to Chinese companies’ long-term success at winning over Western consumers will be their ability to do what Apple does best – truly innovate, said Dr. Paul Irwin Crookes, author of Intellectual Property Regime Evolution in China and India. Apple consumers want the latest and best, and don’t mind paying top dollar for it.

China’s political system is slowing down innovation, Dr. Crookes added. “Indigenous innovation has been particularly disastrous at the political level. (Political interference) has cautioned global firms about sharing ideas with Chinese firms under the aegis of open innovation.”

Dr. Crookes also said that China has made a fundamental mistake in seeing the only way to create innovative capability as a nationalist project, whereas it’s much more about sharing ideas and trust-based collaboration across borders. “Does the Chinese dream allow foreigners to help the country succeed collaboratively? I don’t know the answer.”

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