Apple Takes Another Bite at China

After years of snubbing China, it seems Apple CEO Steve Jobs is finally paying attention to the world's second-largest PC market.

The computing giant unveils its first store in an upscale Shanghai shopping center on Saturday, just its second in the country, after a modest branch in Beijing's expatriate-dominated Sanlitun district opened in 2008. In addition to unveiling the 16,000-square-foot retail outlet, Apple also announced that it plans to open 25 stores in China in the next two years.

The biggest obstacle for Apple in China has been price. With middle-class consumers bringing home less than US$1,000 a month, Apple's appeal in terms of prestige and quality has largely been ignored by local consumers satisfied with knock-offs. The rising incomes of Chinese consumers, however, apparently is giving the company second thoughts.

"For a very long time, Apple basically ignored the market," says David Wolf, chief executive of marketing consultancy Wolf Group Asia. "That only began to change about five years ago."

While Apple's market share in computer sales in China is "no more than a blip on the radar", Wolf says it should be an "extremely important market for Apple". Sales of Apple devices such as iPods, iPhones and iPads on the grey and black markets suggest there is a big opportunity for the company, even though those products have not yet been widely available in the country. In fact, the fast-selling iPad isn't even on sale yet in China.

Another gauge of the popularity of Apple devices in China is to be found in the market for knock-offs. In June, for instance, an iPad-like device in similar packaging to Apple's "magical and revolutionary" tablet computer went on sale in Shenzhen for just RMB700 – about a fifth of the price of the real iPad. Called, imaginatively enough, the ‘iPed', the tablet runs Google's Android operating system.

The expression of commitment to China shows that Apple is starting to make good on initial investments, which started in earnest just five years ago, Wolf says. "Apple clearly sees a need to start more directly serving their potential market".

Part of the appeal of Apple's devices, Wolf reckons, is the evangelical way in which they are promoted. An expanded physical presence in China will help the company capitalize on that, he says. "It's pretty difficult to be an evangelist for products you can't show people."

At the start of the week, one of Apple's chief rivals said Jobs and his company were losing out in China. Lenovo's founder and chairman, Liu Chuanzhi, told the Financial Times: "We are lucky that Steve Jobs has such a bad temper and doesn't care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble."

In hindsight, those remarks seem ill-timed. While Jobs might not have paid much attention to the country, in the recent years before opening its consumer stores, Apple has quietly staffed up in China and begun to demonstrate that, aside from Japan, it is the company's main focus in Asia.

"They're building up a level of very experienced, very savvy people who are well thought of in China," Wolf says. "That's a big plus for the company. That means that institutionally there is infinitely more knowledge about China inside of Apple today than there was five years ago. We cannot discount the long-term value of that kind of investment. If they sustain that, that does improve their prospects on the ground. But until really senior people in the company are paying a lot of attention to China, it's going to be a good market for them but it's not going to be a great market for them."

One of the challenges Apple will face in China – aside from playing catch-up to the long-ensconced Lenovo, HP and Dell – will be adapting to the culture. Apple devices are created to appeal to people in a certain culture, Wolf says, and when the CEO who is driving the company is not steeped in that culture, then it will face problems.

Heavy-hitting American companies including Yahoo and eBay have in recent times tried and failed to adapt to the notoriously difficult Chinese market. Google, too, has had its problems in China, not least of which is a row with the government over censorship of its search engine in the wake of a series of mysterious hacking attempts into Google's email service, which the company claimed at the time could be traced back close to Chinese authorities. The ramifications of that fight are still being played out.

Some industry observers have joked that Apple shouldn't have such difficulties in China, given its willingness to censor applications created by third parties for its popular App Store for mobile devices.

Still, analysts say that if Apple manages to open 25 stores in tier one and tier two cities across the country by 2012, as planned, it would likely make it the company's third-biggest market.

Meanwhile, Wolf thinks Lenovo, HP and Dell won't be overly threatened by Apple's increased presence in the country. "These are companies, particularly HP and Dell, who are learning how to compete with Apple on Apple's home turf and I think they're concerned, of course, but I don't think they're worried that Apple's going to drive them out of business any time soon."

It's an immense country, and there's room enough for all to survive. What the likes of HP and Dell will be wary of, however, is Apple swooping in and creaming off the top of the market – as the company has done so successfully in the US.

Such fears would be well placed. With a 40-foot high glass cylinder thrusting up into the middle of the Pudong financial district, an echo of the brand's flagship glass cube in New York City, Apple has finally staked its ground – and it's far from the back alleys where the iPed is being peddled for a pittance.