Apple & China Unicom Rumors: The China Market For The iPhone

Can Apple stay fresh with Chinese consumers?

We’ve all seen young professionals on Shanghai Metro trains, tapping away at  a game of Solitaire on their new iPhones. The iPhone has transformed into a global phenomenon, and China is no exception. Its sleek design, innovative touch-screen, and ability to support thousands of applications have generated over 20 million units in global sales since its original release in 2007. Although the device hasn’t officially launched in China, trend-conscious consumers flock to electronics markets to purchase imported (but completely unauthorized) iPhones from vendors.

For a while now, Apple has been eying the Chinese market, home to the largest population of mobile phone users in the world. But Apple being Apple, making sales requires an exclusive, tightly controlled contract with one of the country’s leading mobile service providers. For the past couple years, Apple has been flirting on and off with China Mobile – the largest provider with over 415 million subscribers – alas, to no avail. Despite the immense opportunity that China Mobile would’ve provided, a battle of egos resulted in both companies backing out of the potential deal.

There have been rumors of recent talks with China Unicom, China’s second largest mobile provider with a less impressive 130 million subscribers. Experts speculate that the two companies have settled on a three-year deal to bring legit iPhones into China, although no public statements have been made by Apple or China Unicom.

An iPhone with simplified Chinese characters, posted by Sina. Apple and China Unicom have yet to announce a finalized deal around iPhone distribution.

Apple’s modern design and well-guarded brand image has certainly made an impression on the Chinese consumers, and there are already an estimated 2 million black market iPhones in the country. Chinese users are willing to go through the hassle of unlocking the phone, purchasing a flurry of adapters and accessories, and suffering malfunctions and technical problems with no warranty – all to possess one of the most stylish new devices. If the authorized iPhone is a hit, China Unicom could benefit from a boost in customers. Chinese consumers use pre-paid cards instead of signing a one- to two-year contract with mobile service providers, so the cost of switching between providers is minimal. China Unicom would ideally use the iPhone as an incentive to snag some of China Mobile’s most valuable customers. Additionally, China’s expanding middle class will generate new demand for affordable luxuries; the China State Information Center estimates that by 2010, 25% of the Chinese population will earn above 50,000 rmb in annual income.

Despite being a coveted brand in a growing market, Apple still faces potential challenges in launching a legitimate version of the iPhone. While China Unicom is planning to subsidize the devices for mobile subscribers, cheaper copycats continue to exist on the market, satisfying demand from the lower end of iPhone aspirants. And in addition to these fakes, electronics vendors are still bringing in unauthorized iPhones and selling them without the burden of import tariffs; some price-sensitive consumers might decide that a lower price justifies the extra hassle. Despite these cheaper alternatives, would enough upper-middle class Chinese consumers be willing to purchase iPhones through legitimate channels? Even if the demand exists, Apple will need to deal with its relative lack of control over distribution.

Furthermore, much of Apple’s success comes from its App Store, where 1.5 billion applications have already been downloaded. Most of these applications range from 1 to 10 USD. In China, users of unauthorized iPhones have downloaded free applications from various websites and bulletin board systems (BBS).  Would Chinese consumers be willing to pay for these applications? Seems like developers would have to charge a much lower price for Chinese versions of their applications.

And finally, there’s the brewing battle between the Apple and Google for presence in the Chinese market. In response to Apple’s contract with China Unicom, Google announced that it would launch two Android-based devices through a partnership with China Mobile. Google’s earlier entry could dampen Apple’s efforts if Android steals potential market share from the iPhone, which is scheduled to debut sometime within the next year.

Contributed by Mindy Zhang from BloggerInsight