APPLE IN CHINA: SUCCESS, CRITICISM AND COMPETITION

APPLE IN CHINA


Apple factory
Apple’s products are proving to be as desirable for Chinese consumers as for their international peers, but official channels for their sale are extremely limited. The company has only a handful of flagship stores and authorized resellers in the country’s largest cities. Apple is on track to have 25 retail outlets in China by the end of 2012.

Apple was slow to establish its brand in China, but it still wildly popular nonetheless. As of 2011 has had six retail outlets in Beijing, Shanghai and Hong Kong. Apple products sell well in China (as do fake Apple products). Some people waited in line for days to be the first to get their hands on iPads. Others thought nothing of plucking down $900 for a two-year contract for 32-gigabyte iPhone 4.

Barbara Demick wrote in the Los Angeles Times, “Apple's devices are mostly manufactured in China at huge electronics suppliers along the southeastern coast. Foxconn, a Taiwanese firm that assembles iPads and iPhones, has at least 250,000 people working on Apple products on the mainland, according to the group Students and Scholars Against Corporate Misbehavior, a Hong Kong-based nongovernmental organization that has been sharply critical of conditions for Apple workers. Their take-home pay is $150 a month---meaning it would take four months' wages to buy the cheapest model iPad. [Source: Barbara Demick, Los Angeles Times, October 20, 2011]

Many Apple products are made in China by Foxconn Technology Group, a Taiwanese firm, at a massive factory in Shenzhen. A great deal of pressure has been put employees at these factories to stay quiet about the products so as not to compromise marketing plans. In July 2009, one worker killed himself after being accused of taking an iPhone. See Below

Popularity of Apple in China

Reporting from Beijing, Barbara Demick wrote in the Los Angeles Times, “If you are a young man in Beijing and you can't afford a car or an apartment, the next best thing is an iPhone, or better yet an iPad. The cult of Apple reigns supreme in China, to the extent that people like Alex Xing, who works in his family's medical supply business, call it "the era of Apple." "Only the old guys, like 20 years older than me, still use Nokias," said Xing, a 26-year-old hipster who wears self-consciously nerdy black eyeglasses, jeans and sneakers. He cradled his own prized telephone close to his heart as he spoke. "Even the girls I meet in the nightclubs have iPhones.''[Source: Barbara Demick, Los Angeles Times, October 20, 2011]

The extremes to which people will go to get their hands on the Apple brand are legendary. A 17-year-old high school student from rural China made headlines in June when he reportedly sold a kidney to buy an iPad 2. State news media reported in September that a 16-year-old girl in the southern city of Guangzhou was killed in a fight with her mother over whether she could get money for an Apple computer. "I've never seen a country with as many people rising into the middle class that aspire to buy products that Apple makes," Chief Executive Tim Cook said Tuesday in a conference call with analysts. "China---the sky's the limit there."

The Oct. 5 death of Apple co-founder Steve Jobs elicited a rare outpouring of grief among Chinese fans. An online tribute page on China's equivalent of Twitter had 93 million postings as of Wednesday---the most on any one subject since the Sina Weibo service started two years ago. "How come China can produce a Mao Tse-tung but not a Steve Jobs?" grumbled one fan on the Sina tribute board. "When God wanted to listen to music, he took away Michael Jackson; when God wanted to use iPhone 5, he took away Steve Jobs," wrote another.

Apple Business in China

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Barbara Demick wrote in the Los Angeles Times, “Apple's first store in Beijing, a big glass cube in a modernist shopping mall, is believed to be the highest-grossing Apple store in the world. Security guards with earpieces now patrol the front door after a stampede ensued in May as people tried to get their hands on the iPad 2, which had just gone on sale. Demand for the iPhone 4 was so keen that Apple stores required would-be buyers to show identification cards to prevent scalpers from buying up the phones and selling them at a premium. A new Apple store that opened in Shanghai in September drew 100,000 visitors the first weekend, some waiting in line for days to get in. [Source: Barbara Demick, Los Angeles Times, October 20, 2011]

"The [sales] numbers reflect the Apple fever that you see on the ground in China. If you're at a coffee shop or the airport lounge everybody is using their iPad or iPhone," said Josh Ong, China correspondent for AppleInsider.

Criticism of Apple Manufacturing in China

Barbara Demick wrote in the Los Angeles Times, “In a report released last month titled "iSlave behind the iPhone," the group said the extraordinary demand for Apple products was putting great pressure on workers, who often are on their feet for 10-hour shifts, live in military-style barracks and are penalized if they don't work overtime. Turnover is high, at least 19 workers have committed or tried to commit suicide, and three workers died in a May 20 explosion in a workshop operated by Foxconn in Sichuan province, the group said. [Source: Barbara Demick, Los Angeles Times, October 20, 2011]

Environmental groups have also criticized Apple for failing to monitor Chinese suppliers whose plants discharge hazardous wastewater and gases into residential areas. One of the suppliers, Catcher Technology, announced this week that it had partly closed a factory that made high-end metal casings for the MacBook Air because of a "strange odor" that drew complaints from nearby residents. [Source: Barbara Demick, Los Angeles Times, October 20, 2011]

Although the accusations have had some coverage in the United States, there's been hardly any in China. "Steve Jobs has brought many jobs to China. Apple's models are good. Their look and touch is good. That's what's important," said Zhang Haiou, 34, who, dressed in a T-shirt with a photograph of Jobs, was selling cases for iPhones outside the Beijing store last week. [Source: Barbara Demick, Los Angeles Times, October 20, 2011]

If there is any complaint about Apple, it's that it embarrasses Chinese firms that have not been able to muster the same level of innovation.The Communist Party's Shanghai newspaper, Jiefang Daily, weighed in recently, editorializing: "We must get rid of the eagerness for quick success and instant benefits; acquire the spirit of preciseness, stability and greater perfection; and present good products with a sense of responsibility toward customers if we are to come up with our own Apple."

Apple Discloses its List of Suppliers for the First Time

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In January 2012, Apple has disclosed a list of its suppliers for the iPhone, iPad and other popular gadgets for the first time amid growing criticism over labor and environmental practices, especially in China. The list for years has been strictly and fervently protected. Even a glimpse of an Apple iPhone or its components before a public release became a source of intrigue and controversy. Investors have played a guessing game about which contractors would become Apple’s next supplier, or who was on the outs. [Source: AP, January 13, 2012]

Apple disclosed its list of its suppliers responsible for 97 percent of its procurement expenditures worldwide. Some examples are Intel Corp., Broadcom Corp., Amphenol Corp. and Sanyo Electric Co. The transparency may be a sign of changes coming to the Cupertino, Calif. company in the post-Steve Jobs era under CEO Tim Cook. In another shift, Apple also joined the Fair Labor Association, a group of companies and universities focused on improving labor practices. It conducts unannounced, random audits on its members’ factories.

The 2012 “Supplier Responsibility Progress Report” released Friday, documents 229 audits throughout its supply chain last year by Apple Inc. That’s up 80 percent from 127 audits in 2010. The audits found labor, health, health and environmental violations, including instances of underage labor and discrimination based on pregnancy. Apple also outlined its response to each of the violations that were uncovered, which included ending its relationship with repeat offenders and requiring companies to come up with measures to prevent them from occurring again.

The report was issued a day after distraught workers who make Microsoft’s Xbox video game consoles at Foxconn Technology Group climbed to the top of a six-story dormitory and threatened to jump to their deaths. No one did, but the incident highlights growing labor unrest in China. Foxconn is a unit of Taiwan’s Hon Hai Precision Industry Co. that makes iPads and iPhones for Apple. There was a rash of suicides at the massive Foxconn plant in 2010 in the city of Shenzhen. About 300,000 people work at the plant and industrial park. Plant managers installed nets to prevent more people from committing suicide by jumping from the roof.

In its report, Apple found that 78 of the company’s suppliers complied with antidiscrimination standards it has set for them. But only 61 percent of them had systems in place to prevent discrimination from happening. Nearly all---97 percent---prevented underage labor. But only 72 percent had policies in place keep it from happening. Just 38 percent of the suppliers observed Apple’s working-hours policies, and 69 percent followed its code for wages and benefits.

In all, the audits found 74 percent of the suppliers to be in overall compliance with Apple’s policies. Examples of violations included testing job candidates for Hepatitis B, conducting pregnancy tests and exceeding weekly limits of 60 working hours. Apple said 109 facilities it audited did not pay proper overtime wages.

Fake Apple Products in China

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Barbara Demick wrote in the Los Angeles Times, “If imitation is the sincerest form of flattery, Apple has it in droves. The relatively slow pace of opening stores---only four so far in China---has led to knockoff Apple outlets, complete with stark white walls and the logo of an apple with a bite out of it. In the southwestern city of Kunming, Chinese authorities found and closed 22 such stores. [Source: Barbara Demick, Los Angeles Times, October 20, 2011] Although the stores were fake, most of the products were real, sold through unauthorized dealers or brought in illegally through the United States. A scarcity of supply in China and steep taxes on electronics make prices here higher than elsewhere. New products also arrive later in China. For example, the iPhone 4S was released Oct. 14 in the U.S. but is not expected officially for months in China. It was selling last weekend at a Beijing electronics market for as much as $2,000.

Fake Apple Stores in China

A blogger has discovered a fake Apple store operating in Kunming city, China. Pictures posted on the BirdAbroad blog show a sleek Apple store. Sales assistants in blue T-shirts with the company's logo chat to customers. Signs advertising the iPad 2 hang from the white walls. Outside, the famous logo sits next to the words "Apple Store". And that is the clue it is fake. Those words never appear on real ones, which just make do with the iconic symbol. [Source: Reuters. July 2011]

The store looks every bit like Apple Stores found all over the world. But Apple has no stores in Kunming and only 13 authorised resellers in the city, who are not allowed to call themselves Apple Stores or claim to work for Apple. "This was a total Apple store rip-off. A beautiful rip-off - a brilliant one - the best rip-off store we had ever seen," the anonymous blogger posted on Wednesday.

An Apple spokesman in California declined to comment on the fake stores but said consumers can go to the company's website to locate authorised outlets. The manager of an authorised reseller in Kunming, who gave only his surname, Zhang, said most customers have no idea the stores are fake. "There are more and more of these fake stores in Kunming. Although they may sell real Apple products, some of those products were not imported through legal means. And they cost more.''

It was unclear whether the store was selling fake or genuine Apple products. Countless unauthorised resellers of Apple and other brands' electronic products throughout China sell the real thing but buy their goods overseas and smuggle them into the country to skip taxes.

The proliferation of the fake stores underlines the slow progress that China's government is making in countering a culture of a rampant piracy and widespread production of bogus goods that is a major irritant in relations with trading partners.

In August Reuters reported that authorities in Kunming had identified another 22 unauthorized Apple retailers. China’s Administration for Industry and Commerce in the Yunnan provincial capital said the stores have been ordered to stop using Apple’s logo after Apple China accused them of unfair competition and violating its registered trademark, state media said. [Source: Reuters, August 11, 2011]

The market watchdog agency said it would set up a complaint hotline and boost monitoring, the official Xinhua news agency reported. It did not say if the shops were selling knock-off Apple products or genuine but smuggled models.In July, inspections of around 300 shops in Kunming were carried out after a blog post by an American living in the city exposed a near-flawless fake Apple Store where even the staff were convinced they were working for the California-based iPhone and iPad maker.

Iphones in China

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Apple began marketing the iPhone in China in late 2009 through the service provider Unicom, which has 2,000 stores in China. The Chinese model will be more expensive than black market models available and lack WiFi, which allows wireless Internet use, one of its key features. Some of the stiffest competition is expected to come from unlocked iPhones brought in from overseas that have WiFi. [Source: AP]

The iPhone has been legally available only via China Unicom, the country’s second-largest mobile operator. Sales have been sluggish, partly because the price tag for the phone is much higher than for iPhones sold through unauthorized channels. As of late 2009, 1.5 million to 2 million such phones were already in China. Unicom iPhones without WiFi start at $730, 20 percent more than black market models with WiFi. The WiFi is not available because it is banned by the government, which is trying to promote a rival Chinese system. China Mobile has release several smartphone models to compete with the iPhone.

Even though much of the iPhone is manufactured in China the device was not sold there until 2009 because of problems with “regulatory bodies” over the wireless Internet function and the 3-G network its used and delays caused by Apple’s inability to strike a deal with China Mobile, China’s largest cell phone operator. In the meantime sales of smuggled, “unlocked” and counterfeited iPhones and iPhone look-likes like the M8 MiniOne were brisk. Chinese who traveled abroad have been asked by friends and relatives to bring back iPhones for them. A three-step tutorial available on the Internet shows people how it “unlock” their phones so they can be used in China.

Crowd Control Problems at iPhone 4s Release

In January 2012, shoppers in Beijing threw eggs at the Apple store and fought with police when they were told the iPhone 4S would not be on sale as scheduled. In Hong Kong, Apple resorted to an online lottery reservation system for the 4S model after crowd control issues disrupted initial sales.

China Daily reported: “The imminent launch of Apple's upgraded iPhone 4 lured thousands of buyers to its two outlets in Beijing on the cold winter night of Jan 12. But the size of the crowds brought an abrupt suspension of sales of the iPhone 4s on the morning of Jan 13 and one store in Beijing didn't open at all, because the swelling crowd of eager Apple devotees created safety concerns.This is not the first time Apple's marketing strategy has caused such turmoil among the buying public. Similar headlines occurred in January last year when the first incarnation of the iPhone 4 was launched and in May when the second version of the iPad was launched. [Source: China Daily, January 16, 2012]

Apple's clever marketing has made the company's products must-have lifestyle accessories for many, and the company has now replaced Lenovo as the most profitable IT company in China. But as helpful as it is to its bottom line, Apple's strategy for product launches inevitably results in mass hysteria and disturbances and if it continues with this marketing strategy it is only a matter of time before one of its product launches ends in tragedy.

Intentionally fuelling demand by manipulating a product release to the extent that it creates a state of panic among consumers, who fear they may not get their hands on their objects of desire, is not only immoral but also illegal.

Apple should heed the lessons from the experience of Unilever. The giant consumer goods company was fined 2 million yuan ($31.74 million) in May 2011 by the Chinese price authority for repeatedly spreading rumors of price rises that artificially boosted demand for its products. Apple has the ability to make it easier for consumers to order new products online or by telephone. Apple cannot afford to ignore the Chinese market, so it has no excuse for not changing its strategy so as to avoid such incidents in the future.

Apple Losing Market Share in China’s Smartphone Market

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In February 2012, Reuters reported: Apple’s share of China's booming smartphone market slipped for a second straight quarter in October-December, as it lost ground to cheaper local brands and as some shoppers held off until after the iPhone 4S launch last month. China, the world's largest mobile phone market, has not been easy for Apple, which is grappling with a lawsuit from a local firm over the iPad name and issues at its suppliers' factories over wages and working conditions. [Source: Reuters, February 17, 2012]

With the number of mobile subscribers set to top 1 billion in China this year, there is cut-throat competition among South Korea's Samsung Electronics Co Ltd, Nokia, Apple and local firms Huawei Technologies Co Ltd and ZTE Corp. While Apple regained its top spot as the world's largest smartphone vendor in the fourth quarter of 2012 and for last year as a whole, it slipped to 5th place in China, overtaken by ZTE. Apple's China smartphone market share slid to 7.5 percent from 10.4 percent in July-September. Gartner said this week it expected Apple's iPhone market share to slip for a couple of quarters as the novelty of its latest 4S model wears off.

But given the sheer size of the Chinese market, just targeting the highest end users should be enough for Apple, though it's not always been a smooth ride. In Shenzhen, some genuine iPhones and iPads are smuggled in from Hong Kong, while sellers also take advantage of Apple's popularity by packaging fake iPhones in iPhone 5 boxes - even before the 4S was launched.

Analysts expect Apple to stem its slide in market share in China by signing up another carrier. China Unicom, the country's No.2 telecoms operator, is currently the only carrier to officially carry the iPhone. It has not officially given its iPhone sales, but analysts estimate it has sold around 3 million iPhones since signing a contract with Apple in 2009. China Telecom Corp Ltd, the third and smallest operator, is expected to be next to clinch a similar deal with Apple later this year, and analysts predict it would sell about 1.4 million iPhones this year if it can reach a deal with Apple by May, rising to 2-4 million new iPhone users in 2013.

Fierce Competition in China’s Smartphone Market

In the last quarter of 2011, Reuters reported, Samsung knocked Nokia off the top slot, taking 24.3 percent of the market, more than three times Apple's share, data from research firm Gartner showed. Nokia's market share more than halved last year, from above 40 percent in the first quarter to below one fifth by the fourth quarter. [Source: Reuters, February 17, 2012]

"Chinese handset makers have been actively promoting their smartphones with China's three telecoms operators, so we saw ZTE and Huawei gain significant market share," said Taipei-based Gartner analyst CK Lu. In the first quarter of last year, ZTE had a market share of just 3 percent, but ended 2011 ranked 4th with more than 11 percent market share.

Chinese firms are gradually shifting up towards the higher end of the market, unveiling more feature-packed smartphones. "If you want to sell handsets to the mass market, a simple rule of thumb in China is that the handset price has to be close to 70 percent of the monthly salary," said Jayesh Easwaramony, an analyst with Frost & Sullivan in Singapore. "Today, an iPhone is more than two months salary." This, said Easwaramony, gives the likes of Huawei and ZTE the opportunity to cater to a mass market that is captivated by the iPhone, but doesn't have the purchasing power for it.

"The quality of Huawei's phones is quite high and it's good value for money compared to the iPhone," said Dale Dai, a 28-year-old sales executive from Beijing. Dai, who uses his Huawei phone to write weibo, or Chinese microblogs, surf the Internet and make calls, recently bought a new Honor smartphone for 1,800 yuan ($290), almost a third of the price of a new iPhone 4S at 4,988 yuan.

Samsung’s Smartphone Market Share More than Triple Apple’s Share in China

Samsung’s market share in the Chinese market is three times larger than Apple’s and still growing, Bloomberg reported. Apple recently began to sell its flagship smartphone on the nation’s third largest carrier, China Telecom, in addition China Unicom, which up until recently was the exclusive carrier of the iPhone in China. The new partnership, however, may be too little, too late. “I don’t expect Apple to replace Samsung any time soon,” Gartner analyst Sandy Shen said. “China Telecom is the nation’s smallest carrier, so the extent to which they can help Apple is quite limited.” Read on for more. [Source: Dan Graziano, BGR, March 13, 2012]

Apple’s smartphone market share in the country currently sits at 7.5 percent compared to Samsung’s commanding 24.3 percent. The 16.8 point gap between the two companies has nearly doubled since the third quarter, though Apple is still the top smartphone vendor globally by volume. China is a huge market though with smartphone shipments in the country expected to jump 52 percent to 137 million units in China, overtaking the U.S. for the first time ever as the world’s largest market.

Unlike Apple, Samsung offers its mobile devices on all three major carriers, including the world’s largest carrier, China Mobile. “Having access to more subscribers gives vendors like Samsung an advantage,” said Teck Zhung Wong, a Beijing-based analyst with IDC China. “If Apple is going to continue to grow in the Chinese market, it has to consider very seriously a handset with China Mobile.” Despite not selling the device, or even supporting 3G speeds with it, China Mobile currently has more than 15 million iPhone users, all of whom purchased the device unlocked.

Lenovo: Apple Is Losing out in China

Apple is missing a huge opportunity in the Chinese market, according to Liu Chuanzhi, the head of Lenovo. maker. Speaking of Apple’s chief executive, Liu 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.” [Source: Kathrin Hille, Financial Times, July 4 2010]

Mr Liu told the Financial Times the LePhone, Lenovo’s first signature product in its push into mobile devices, was well placed to compete with the iPhone in China because the device, launched earlier this year, was customised for Chinese users. “This is a very practical thing. The iPhone has more than 100,000 content providers, and we have no more than 1,000,” he said. “But our Chinese customers feel our applications are very convenient to use.”

Image Sources: Wiki Commons

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Yomiuri Shimbun, The Guardian, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated April 2012

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