The iPhone In China: Ain't No Mountain High Enough.
At least once a week, I will sarcastically say, "I'm from the government and I'm are here to help you." I love blaming the government for just about everything. But even I have my limits.
In its post, "The iPhone debate: what can Apple do?" China Herald has a nascent debate going on regarding Apple's China foray. On one side, Shaun Rein, who believes Apple's less than stellar start in China is its own fault and believes it needs to do the following to succeed in China:
1. Listen to local consumers
2. Pick China Mobile as a partner rather than China Unicom
3. Treat China as a part of the global market, not as a separate one
On the other side sits PTaylor, who blames the Chinese government for Apple's alleged woes.
To which Rein has this to say:
I always like it when people say it is all the government's fault and there is nothing companies can do to get around it. That is sometimes true but smart companies will evolve business plans for local conditions to factor in local regulations and market conditions. Apple did not do that well enough.When people say that, they just don't know enough about how to get things done in China or, as is often the case, local execs do know what to do but they can't get buy-i from the home office.
For instance, eBay failed in China more because of meddling from the home office than from folks in China -- they were actually quite good but just ignored.
So, Ptaylor, my advice -- learn how to deal with obstacles rather than just
complain about them.
Who's right?
Well, of course, they both are to an extent, but I overwhelmingly side with Shaun on this one, despite being an Apple shareholder and massive fan of the company.
But let me start out by stating as clearly as possible that I do NOT think Apple is failing in China. I do not know exactly how well or how poorly it is actually doing there, but the reason I am certain it is not failing there is because it has not been there nearly long enough for anyone to say it has failed, or even that it is failing. Apple is a big company and I am quite certain that it plans on being in China for the long haul and until the long haul is over, one cannot ascribe failure to it. Apple is still in the "getting its feet" wet stage in China and it is not fair to pass anything close to final judgment on it until it has gotten well past this stage. I again urge everyone to read the book, Chocolate Fortunes, to better understand how it can take a long time and a lot of money for a big company to establish a consumer foothold in China. Let's just say Apple's conduct in China has not caused me to even think about selling even one share of my stock.
But I side with Shaun nonetheless because it is not right to blame the government for Apple's alleged shortcomings in China because the responsibility rests with Apple to know of government issues before entering into the China marketing and to have a plan for dealing with them. If Apple did not know of the governmental issues it would face and did not have a plan in place for dealing with them, and if those issues are going to prevent Apple from succeeding in China, long term, then Apple should not have gone into China. My guess is that Apple did know of most of the major hurdles the government would be throwing up against it, does have a plan for dealing with them, and does (and almost certainly will) know how to succeed in China despite them.
Again, my response here is based largely on my own experience with assisting other foreign companies in going into China. In the typical situation, the smart company knows and plans for most (though certainly not all) government obstacles to its doing business in China. The smart company also knows whether those government obstacles are likely to fall disproportionately on them or whether they are going to be spread around fairly evenly among both them and their competitors.
It is the very rare situation where I would be willing to blame the government for my clients' failing in China. In fact, it is the very rare situation where any of my clients have even sought to blame the government for their own failures in China and even rarer still where I would agree with them.
We had one client who set up a factory in China only to discover that it would need environmental approval to import one of the key component for its product. This client made a mistake in not checking this out first, but it did not blame the government for this; it merely went through the somewhat arduous process of getting that component approved.
We had one client who was fairly hard hit by a change in China's tax laws that caused it to make sense to restructure its business entities a bit. This client did the restructuring and talked often of how its having done this so quickly would actually give it an edge over some of its slower moving competitors.
We have had a million clients who have had issues with the government regarding countless things (zoning, labor issues, tax issues, etc.), but virtually all of them worked these things out and virtually all of them acted as though these sorts of things are just par for the course in doing business anywhere.
We have had clients who have invested money into China and/or started businesses there that were later declared illegal for foreigners. These businesses had to close down and in these cases, it would not be fair to blame my clients entirely for their situation. But is this really any different from the risk any business faces of its business being declared illegal or becoming obsolete. When Seattle banned all smoking within a business, a couple of cigar bars had to shut their doors. As people move to the internet, newspapers are shutting down. Though I certainly do not entirely blame the impacted businesses for their plight, I do think that any business runs an existential risk and that is life.
The truly nimble business will nearly always survive, no matter what the external conditions.
Blame the business or blame the government? What do you think?
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Yesterday I did a post on Apple's alleged iPhone failure in China, entitled, "The iPhone In China: Ain't No Mountain High Enough." I say "alleged," because though iPhone sales have not soared in China, I remain confident Apple will do just fine there. ... []
Comments
Dan, I would agree with you that I do not see Apple as failing in China. Perhaps it would be better stated to say that the Unicom / Apple arrangement has not taken off as expected, but given there are still a half million iPhones in China, I would say that Apple has not only listened to the "local" market, the local market is clearly willing to buy the iPhone.
So, in that sense Shaun is right. The Unicom/ Apple arrangement does not meet the market (his insight about prepaid cards is very important).
Where I side a bit more with PTaylor is that Apple had been trying to work out a deal with China Mobile, but was running into a wall over fee sharing (China Mobile said no.. at first)... and what is interesting is that now that Unicom is working with Apple, the talks with Mobile seem to be back on. Talks that Apple are probably able to drive a bit more than before (threat of Mobile monthly customers moving to Unicom is a carrot).
Where I think both of them failed to accurately assess the failure of the iPhone is on iTunes. Apple's most profitable unit, and it is here where things need to change. That, if iTunes could be opened locally, and Chinese content developed/ added, then the full success of the iPhone could be measured. Unitl then, you are only measuring handsets, and that is not a fair assessment when looking at the true profitability of the iPhone.
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Posted by: All Roads | November 21, 2009 8:41 AM
Given China's long-term drive to hog down all the manufacturing as well as the brand power there is, why would Apple think that Chinese company would allow them to just waltz in the market and start a new craze?
Oh yeah, and apparently Apple thinks it they can price iphones at 3 times the American price in a third-world country and still get a following.
The decision-making level just hit their collective heads on something hard.
Posted by: HJG | November 21, 2009 3:04 PM
Asian nations, for whatever reason and by whatever means, have always preferred their own companies and services to outside ones. If you look at Japan and Korea, penetration from foreign companies pales in comparison with say, Europe or India, or the Mideast. China is no different. It's not just eBay or Apple, have a look at every online service that's tried to enter China. Americans may abhor this as "protectionism", but Chinese praise it as domestic economic strength.
Posted by: Anon | November 21, 2009 7:05 PM
Dan,
It’s certainly not beyond the government in China to stymie business opportunities for private enterprises (both local and foreign invested) for less than reasonable justifications.
Even the nimble can get squashed here.
You can attempt to understand the motivations of the government in China and prepare for likely eventualities, but how do you prepare for all of them? Green Dam, online gaming bans, NPL collection restrictions, private mining operations forced to sell out, and the VAT rebate merry-go-round; the government has repeatedly shown that they are open to ham-fisted, knee-jerk reactions to solve political or economic concerns. Are the companies that are affected by these decisions at fault for not anticipating these problems? Perhaps in some cases.
That being said, I don’t know if the government is to blame for the iPhone. To be honest, it seems that there’s quite a lot of speculation and scant details on the negotiations between Apple and the carriers.
I do know, however, that not all failures have someone to blame or a lesson to be learned.
Posted by: Tim | November 21, 2009 11:16 PM
A few points on iPhones in China. I have one and use the China Mobile network. As does my wife. And all of the foreigners in my office except two (one of whom, ironically, uses the Unicom network with a different phone).
Last week I went to a bar with five friends. And we all had iPhones. And this isn't just among foreigners. I was in a restaurant over a year ago and noticed nearly all of the Chinese couples around me had an iPhone each--a year before they were officially on the market.
I only know one person who uses China Unicom with his iPhone. And the reason he does is because China Unicom is on the international 3G standard (China Mobile uses an indigenous one). So Apple would have to re-design their phone and license the domestic technology to sign up with China Mobile. Given that so many people ship them into the Mainland from HK--to the tune of millions last year--I suspect Apple knows they can capture a lot of the Chinese market without officially being on the preferred network.
Whatever the official numbers are for iPhones in China, the real impact of sales in the China market is best revealed by comparing number of worldwide sales with number of official service subscribers that officially have iPhones. That will tell how many phones are showing up in China. In the end, does Apple really care how people are buying them...as long as they are able to sell?
Seems like they have the best of both worlds.
Posted by: Cup of Cha | November 22, 2009 6:22 PM
Just because nobody is buying Unicom's crippled iPhones doesn't mean that the iPhone is a failure in China. Unlocked imported iPhones are selling better than ever because of all the publicity about the official model. It's true that the actual sales are recorded in the US or Hong Kong, but a lot of money is still making its way from Chinese users to Apple. You can see a similar situation with jewelery retailers; their stores in China are mainly storefronts where Chinese people can choose what they want before going to Hong Kong to buy it.
Posted by: Kevin | November 22, 2009 6:23 PM
A lot of red tape going on? Whatever the reason is, we have to respect the Chinese government's decision when it comes to the iphone trade.
Posted by: iPhone Dude | November 22, 2009 7:54 PM
I second cupofcha. Everyone in China already has an Iphone! Because if u got enough money for fashion phones, u pass HK once in while and buy the not crippled Iphone that runs just fine on whatever carrier.
Chinese like Apple, love the Laptops, especially since QQ is finally out in a decent Mac Version, love the Iphone, and Apple knows pretty well what they have to do in China, after all, they are producing here since ages and all their suppliers are chinese/taiwanese.
Btw, Dells new Mini 3i smartphone will be out next week, one of a large lineup of Android devices labeled as Ophone and specifically made for China Mobiles 3G network. China mobile wants their own brand to be established is my guess.
Posted by: Lostin Madnez | November 23, 2009 3:47 AM
@Kevin (http://www.chinalawblog.com/2009/11/the_iphone_in_china_aint_no_mo.html#comment-331398),
That was gorgeous...I wish I would've had the eloquence to put it in just so many words. Hear, hear!
Posted by: Adam Daniel Mezei | December 2, 2009 7:00 AM
Just a few points as an iPhone user in China...
1) I can believe the statement about there being 1 million grey import iPhones in China. In fact, I think the number may be much higher.
2) Apple's been running commercials on Chinese TV featuring the iPhone and the applications (Chinese) it can run ever since the "official" Chinese iPhone (China Unicom) was launched. Note these commercials are by Apple, not China Unicom. I don't think Apple's too worried that they've only sold 5000 official iPhones so far. Right now I think they're targeting owners of grey market iPhones to buy these apps and generate even more momentum - the CU deal has given them an outlet to do so.
In fact, I recently made my first app store purchase as a result of seeing an app that was featured on this commercial (prior to this I'd been using free apps).
I just finished reading the article linked above (http://ultimibarbarorum.com/2009/11/14/an-article-wherein-it-is-explained-why-everything-written-so-far-about-apples-iphone-launch-in-china-is-beside-the-point/#comment-5297) and it sums things up much better than I did here. In particular, I liked this quote:
"The upshot: anecdotal reports tell of aftermarket prices increasing for Hong Kong iPhones these past few weeks, as demand increased. Clearly, the advertising is working, even if China Unicom’s sales of wifiless iPhones are anemic.
There is a certain poetic justice to the whole spectacle: China Unicom, a state-owned company, forced to sell inferior iPhones in a porous market due to stupid laws promulgated by the Chinese state, spending on advertising that mainly benefits the aftermarket for Hong Kong iPhones."
3) In Hong Kong the iPhone 3GS is still sold out even after the supply issues have supposedly been resolved - there's a one week wait if you order directly from Apple. It wouldn't surprise me at all if the majority of the iPhones sold in HK end up getting used elsewhere. For those wondering why the HK version is so desirable, it's because it's factory unlocked and can work on all carriers without hacking/jailbreaking.
Posted by: Gerald | December 6, 2009 10:32 PM