Chinese Apple?

Why Apple might now win in China

Shelly Palmer

This past week Apple posted the highest quarterly earnings in American history. The reward for this incredible feat was a decline in share prices that chopped approximately $30 Billion off Apple’s market cap (that’s like wiping out the value of a company the size of FedEx overnight). During the earnings call, Apple CEO Tim Cook said, “Beyond the short-term volatility, we remain very confident about the long-term potential about the China market and the large opportunities ahead of us, and we are maintaining our investment plans.” That should have calmed long-term investors’ nerves, but clearly some were not impressed.

Cook said that revenue in the greater China region grew 14 percent over the prior year, 47 percent sequentially, and 17 percent year-over-year in constant currency, and added that the results “were fueled by our highest ever quarterly iPhone sales and record App Store performance.” Importantly, Cook admonished that Apple remains “very bullish on China” and doesn’t “subscribe to the doom and gloom kind of predictions.”

Taken at face value, it looked like Apple was doing great (best quarter in American history), had realistic expectations about potential ups and downs that are tied to greater economic conditions, and with ~$200 Billion of Cash-in-Bank was well positioned to weather this (or any other) kind of economic storm. But there’s another side to the story.

China Is Not America

If you don’t live in China, it’s hard to understand the complex relationship the Chinese people have with Western brands. I wrote a little bit about this back in May 2008 in an article entitled, “Chinamerica – An East/West Mashup.” So important are authentic Western brands that it is often said, “People who live in Shenzhen want to shop for full-price luxury goods in Hong Kong to ensure their authenticity – while people who live in Hong Kong want to travel to Shenzhen to get high-quality low-priced knock-offs.” This brand-crazy sentiment on the Mainland is more than partially responsible for Apple’s success. In China, an iPhone is a personal manifesto. It defines its owner in ways that far exceed our Western notion of status symbols.

But even the most affluent of Chinese have a practical side when it comes to personal utility, and there are forces afoot in China that are making it hard to imagine a bright future for Apple.

Thought Leaders Are Backing Off

First, there is a cautionary mood that is blocking some sunlight for our friends in Cupertino. Chinese officials are no longer conspicuous consumers. Where it was once “cool” for a government official to flaunt a device he or she could never possibly afford on their government wages, it is now “uncool” in the extreme. You don’t see as many (if any) thought leaders, movers or shakers putting their iPhones on the table to “make sure you see that they have an authentic Apple device.” Quite conversely, they will make sure that you see a Chinese phone that is within their means. This trend has been super noticeable over the past year or so and most of my colleagues, who do business in China, have noticed it.

The Techno Divide

Next, China is techno-divided East/West. People in the West are smartphone people (and they are slowing down); in the East, they are feature phone people (they have yet to speed up). One of my colleagues who does phone-based currency and brand promotions across the globe has very solid data to back this up.

Without a Full Ecosystem …

But the most important headwinds for Apple will come from forces it cannot market its way through – restrictions on the ecosystem. Xiaomi, Huawei and LeTV (to name a few) are offering end-to-end consumer experiences that are well priced and seem to be unrestricted. On the other hand, Apple’s ecosystem is not allowed to “function as designed” in China. This, more than any other issue, will determine Apple’s fate in Greater China.

Giant Aftermarket

What can you do with a non-fully-functional iPhone in China? Quite a bit, actually. The aftermarket for iPhones is robust. Most Chinese who own iPhones are super careful with them. Many use Apple’s assistive touch feature (created for people with disabilities who can’t push the home button).

The feature places an icon on the screen that allows access to iPhone functions. Why use an icon instead of the home button? So you don’t wear out the home button, of course. It goes deeper. Screen protectors are serious business in China, as are phone cases – when you’re done with your iPhone in China, it will be resold for its highest possible value. Importantly, if you wear your iPhone like a fashion accessory and only take it out for show (using your Chinese phone as a phone), it truly becomes an objet d’art – not a great future for Apple.

Why would someone carry an iPhone just for show? I was at the Peninsula Hotel in Beijing a while back and a woman walked through the lobby in pink pajamas and fuzzy slippers. The pajamas were from Zimmerli of Switzerland and the price tags were still on them (so we could see that the PJs were Zimmerli and that they cost over $1,000 USD). Welcome to the use of Western brands in modern Chinese culture.

The Future

China is a complicated place, and it is nothing like the West. If you apply your rational Western thinking to a Chinese business issue, you are going to get it wrong – every time! Yes, there is an economic slowdown in China and yes, it is cyclical, but like the subtle flavors of Tan Cuisine and the teachings of Sun Tzu, the future of Western brands in China must be thought of in context.