2/28/24, 10:45 AM The iPhone in China: Will Apple Connect with the World's Biggest Mobile Market?

iggest Mobile Market? - Knowledge at Wharton

A business journal from the Wharton School of the University of Pennsylvania

The iPhone in China: Will Apple

Connect with the World’s Biggest
Mobile Market?
September 16, 2009 • 12 min read

Global launches can be rocky, as Apple knows well. Last year, the company
introduced its iPhone in India, but instead of the throngs of consumers seen
at launch events in the U.S., the journalists assigned to cover the rollout
reportedly outnumbered the customers. According to experts, the problems
included a lack of marketing and a price tag set too high for Indian
consumers. Now, as Apple prepares for an October launch of the iPhone in
China in cooperation with service provider China Unicom, many are
wondering if it will face similar hang-ups in the world's largest cell phone
market.

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MARKETING

Featured Faculty Written By

David Hsu , J. Wesley Hutchinson , Knowledge at Wharton Staff

Jehoshua Eliashberg , Kartik Hosanagar ,

Marshall W. Meyer , Philip Nichols , Z. John Zhang

Global launches can be rocky, as Apple knows well. Last year, the
company introduced its iPhone in India, but instead of the throngs of
consumers seen at launch events in the U.S., the journalists assigned
to cover the rollout reportedly outnumbered the customers.
According to experts, the problems included a lack of marketing and
a price tag set too high for Indian consumers. Now, as Apple prepares
for an October launch of the iPhone in China in cooperation with
service provider China Unicom, many are wondering if it will face
similar hang-ups in the world’s largest cell phone market, which has
more than 700 million subscribers.
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“I don’t think Apple or Unicom should assume it’s going to be a slam

dunk,” says Wharton management professor David Hsu.

China Unicom, the country’s second-largest mobile phone operator,

officially announced on August 28 that it had signed a three-year,
non-exclusive agreement with Apple to sell the iPhone 3G and 3GS
models in China. Company chairman Chang Xiaobing told reporters
in Hong Kong that China Unicom would subsidize the device, but
neither Apple nor China Unicom has released specific details about
price or terms of service. The company did say it would forego
Apple’s traditional revenue-sharing model and would instead pay on
a wholesale basis.

Excitement about the launch is building. In image-conscious China,

the iPhone is considered sleek and fashionable. BDA China, a Beijing-
based advisory firm that covers China’s telecom and technology
sectors, forecasts the iPhone will take 10% to 15% of the Chinese
smartphone market in the next few years.

Still, Apple has considerable obstacles to overcome in China,

Wharton experts say. Unlike its U.S. launch in June 2007, the iPhone
faces stiff competition in China from a variety of touch-screen
devices. The Chinese version of the handset is also somewhat
crippled: The first batch to come out in October will reportedly have
no Wi-Fi function, the result of government mandates that were
rescinded in May after production had already begun. Perhaps the
iPhone’s biggest hurdle is China’s thriving grey market, which has
already smuggled more than a million iPhones into the country.
Experts say the trick will be to price it right: low enough to drive
sales, high enough to maintain its exclusive edge.

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Well-heeled Gift Givers

When Apple launched the iPhone in India last August, one reason it
didn’t initially gain traction was the absence of any marketing
buildup — or “big splash” — like the device had when it was first
launched in the U.S. So far, that’s not been the case in China. Philip
M. Nichols, a Wharton professor of legal studies and business ethics,
noticed on recent trips to China that the hype was starting to build.
“You cannot go into [French supermarket chain store] Carrefour in
Beijing right now without getting iPhone advertising right in your
face,” says Nichols, who visited twice in August. “They are really
advertising the heck out of it.”

Nichols is not sure how much the advertising will translate into
sales. “We think of China as a never-ending fountain of revenue, but
there are far more people in China who cannot afford this
technology than there are those who can.”

The iPhone will likely appeal to well-heeled Chinese, says Wharton

management professor Marshall Meyer, who studies China and visits
often. “There’s this upper crust of people who have a lot of money
and they want the latest accessory. The iPhone is the latest
accessory.”

The Chinese penchant for style does not always favor the most
expensive item, however. Wharton marketing professor John Wesley
Hutchinson learned this from a project that one of his students did
in the late 1990s in China about Windows CE, a stripped-down
version of Microsoft Windows designed for handhelds and other
devices. At the time, devices with Windows CE were arguably the
most functional but somewhat “clunkier” than others in terms of

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style, Hutchinson recalls. The study found that Windows CE devices

got “surprisingly strong competition from lower-priced, not
necessarily as functional … but stylish” competitors. “One of the big
lessons that came out of [the project] was that in the Chinese
market, while functionality is important, style is actually more
important.”

The student’s project also highlighted the importance of China’s

gift-giving market, Hutchinson notes. “You give good gifts to your
boss [for example], so there are price bumps related to that.” If
priced too low, the device might not make a good gift; priced too
high, it might be out of a gift-giver’s range. His conclusion: “The
consumer market in China can be quite different from the U.S. in
unexpected ways.”

Industry Dynamics

Price was a considerable sticking point when the iPhone made its launch in India. At the time of the

launch, the 8GB version cost $710 while the 16GB iPhone was priced at $825. The reason for the steep

price tag is that in India, unlike in the U.S., cell phone service providers do not subsidize handsets. In

the U.S., the iPhone is sold exclusively through AT&T, which subsidizes the phone in exchange for a

long-term contract. Most mobile phones in the U.S. are subsidized by carriers, that lock customers

into contracts in order to make back the subsidy over time.

But in countries like India, where the average revenue per user (ARPU) for cell phone subscribers is

considerably lower than in the U.S. and users tend to rely on prepaid phone cards, carriers cannot

recoup the cost of the device through contracts. Similarly, in China, a large percentage of mobile

users use prepaid phones and SIM cards that can be transferred easily from one phone to another.

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China Unicom has not announced whether the iPhone will be sold with a contract or not, which

would certainly affect its pricing. In Hong Kong, for example, the price of a 3GS iPhone ranges from

$5,388 to $6,288 Hong Kong dollars ($695 to $811 in U.S. dollars) because the phones are sold

unlocked, meaning they are not attached to a contract with a carrier.

Apple may also be at a slight disadvantage in China because of its partnering with China Unicom. “In

the U.S., Apple managed to land a deal with AT&T,” notes Kartik Hosanagar, Wharton professor of

operations and information management. “In contrast, in China, Apple could not get a deal with

China Mobile, which has the largest share of the market…. So an important factor is that the share of

the market that Apple is getting through China Unicom is much smaller.” China Mobile had 497.7

million customers at the end of July, while China Unicom had only 141.1 million. China Unicom,

however, is the only one of China’s three telecom operators to operate the W-CDMA technology that

the 3G iPhone uses, according to BDA China.

It is not clear how China Unicom’s second-place status will affect

iPhone sales because the company hasn’t revealed what special
services or subsidies it might offer, or if the phone could be
unlocked. Since Apple’s agreement with China Unicom is not
exclusive, other carriers or companies could theoretically sell the
iPhone. And, as has already been proven in China’s grey market, a
hacked iPhone will function on any of China’s mobile networks.

In fact, one of the biggest question marks concerning iPhone sales is

how much the grey market may have already dampened demand.
BDA China estimates that more than 1.5 million iPhones have been
smuggled into China so far, and many run on GSM networks
operated by China Mobile.

Competing Devices

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The iPhone also faces a host of competing devices in China. China

Mobile is expected to partner with Beijing-based Lenovo, Texas-
based Dell and Taiwan-based HTC to launch a range of smartphones
based on Google’s Android operating system. Rumors are that
Canadian firm Research In Motion, which makes the BlackBerry, and
California-based Palm are in talks with China Telecom to offer their
devices. All will have to compete with the current giant, Finland-
based Nokia, which captured 67.3% of China’s smartphone market in
2008, according to Beijing-based CCID Consulting. According to
CCID, 97% of China’s smartphone market in 2008 went to just five
brands: Nokia, Motorola (based in Shaumburg, Illinois), Dopod (of
Shanghai), Amoi (based in Fujian, China), and Samsung (Seoul,
Korea).

Mark Mechem, a consultant who works in Shanghai, says the Nokia

E71 is a favorite smartphone choice in China. While attending a
dinner event in Shanghai earlier this year, he says he was “surprised
to find eight of the 11 people at my table … were all using the E71.”
Now, he adds, people are looking forward to the iPhone’s release.

Wharton marketing professor Jehoshua Eliashberg wonders how

the iPhone will stack up against competitors. Although future
versions of the iPhone in China (beginning in 2010) are expected to
be Wi-Fi enabled, the device is not expected to have Wi-Fi when it
launches in October. Not having Wi-Fi capability could be a
disadvantage, given the growing importance of Internet access to
Chinese cell phone users. According to a BDA report published on
August 12, “China now has 15 million users of smuggled Wi-Fi
handsets, accounting for 80% of all smuggled phones. Purchasers
ranked Wi-Fi as the second-most important reason for their choice

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of a smuggled phone, after cheaper prices.” BDA forecasts that sales

of handsets with Wi-Fi capability could climb from 800,000 today to
5.2 million units by 2013.

According to a report by BDA, Beijing had originally banned Wi-Fi in

order to promote the domestic WAPI (WLAN Authentication and
Privacy Infrastructure) standard. The Ministry of Industry and
Information Technology (MIIT) changed its policy in May, approving
Wi-Fi enabled phones as long as they also provided for the WAPI
standard. That was after the iPhone went into production, however.
Motorola released the first dual-capacity handset, the A3100, after
these rules were changed. Since Beijing has allowed dual WAPI/Wi-
Fi, more global vendors have decided to enter the market. BDA
says there are currently 10 models undergoing MIIT’s license tests,
including devices from LG, Nokia, Samsung, Yulong and ZTE.

Eliashberg notes that the iPhone will also have to be functional in

terms of inputting Chinese characters — an important consideration
for Chinese mobile users, who like to text. And iPhone applications
will have to be adapted to the Chinese market. “I don’t think the
most popular applications in the U.S. will be the most popular in
China,” he says. “I think that in order to enhance the likelihood of
succeeding, [Apple] is going to have to redesign the applications.”

The competition is all the more difficult for Apple since the brand is
not as well known in China as it is in the U.S., Eliashberg points out.
Apple’s iPod, for example, has not been as popular in China as in the
United States because mainstream Chinese tend to choose lower-
end MP3 players, according to CCID. Apple opened its first store in
Beijing in July 2008, but the “cult” that surrounds Apple in places
like the U.S. has yet to grow strong.

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Wharton marketing professor Z. John Zhang is more optimistic.

Zhang, who uses an iPhone himself, says people have been using
iPhones in China for the past two years and the Chinese-language
software installs and works well. “Without any marketing inside
China, Apple has managed to sell a large number of iPhones” through
the grey market, he notes. Apple could actually use the grey market
to its advantage by capitalizing on the iPhone’s existing popularity,
Zhang adds. “They can say, ‘We know you love the product.’ That’s
not something they could do when they initially launched the
product [in the U.S.].”

Pricing It Right

Zhang sees price and brand maintenance as Apple’s biggest challenges. “It would be very tempting

to lower the price and sell to a lot of people. If you do that you’ll lose the brand equity you have up to

this point,” he says. Once the iPhone is widely available in China, “that’s probably going to destroy

the exclusivity somewhat. They have to manage that transition process well … [so as] not to destroy

the brand image and cachet that is associated with the phone.”

Hsu agrees that Apple’s challenge is marketing the phone at the

right price. “They’re going to have to figure out [whether] this [is]
going to be a high-end, exclusive product, or are they going to scale
down like in the United States and sell it at Walmart?”

Zhang thinks Apple and China Unicom should keep the price of the
iPhone above 1400 yuan (about $205) to maintain its allure. The
price is high — about a month’s salary for a recent college grad. “The
iPhone is not meant for the mass market and I’d be surprised if it is
sold as a mass market product,” says Zhang. “It will most likely target

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high-end, image-conscious users. Even in that case, there is surely a

potential for price wars if you are not careful, as competition is more
than happy and willing to drag Apple into the mud.”

Hosanagar agrees. “[Apple is] not just managing its revenues in one
market; it’s managing its brand as such. Apple’s margins on the
iPhone are just fantastic; I don’t think that Apple would want to
compromise on that.”

Both Zhang and Hosanagar point out that if the phone is priced too
low, a reverse market could occur. “If the iPhone is over-subsidized
in one market, especially with no contract, clearly people would buy
a lot of it in one market and ship it to another,” Hosanagar says. “So
the question is: How will it work in China? To what extent will China
Unicom subsidize the phone? Is there a price point that clearly
works?”

In India, Apple has continued to struggle to sell the iPhone, largely

due to price, Hosanagar says. “My sense is that Apple has learned a
lot of things from India. I look at the U.S. and India, and in terms of
success, they were polar opposites. China will probably be
somewhere in between.”

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