With the market in the United States pretty much saturated, Apple is looking to China with fresh eyes.
Apple CEO Tim Cook caught many people's attention with a statement made during an interview with state run newspaper Xinhua News while on a recent visit to China:
China is currently our second largest market. I believe it will become our first. I believe strongly that it will," he said.
Prediction? Aspiration? Either way, Cook is betting on China for the future of Apple. He has made three visits in as many years to the country.
A New Model?
Cook's visit was preceded by reports of a cheaper iPhone in the works in the Wall Street Journal, which quoted sources close to the issue that such a device could possibly be out before the end of 2013.
While some think that such a move would cheapen (literally and figuratively) the Apple brand, others see it as an inevitable and necessary move to tap into the enormous untapped market in China. With phones from Samsung and Lenovo as well as smaller local brands all offering cheaper alternatives, a cheaper iPhone may need to be the way forward.
The iPhone 5 is currently listed for the equivalent of US$ 850 on the Apple China site, which is more than 25% of the average urban residents’ income of US$ 3920 (and this is after a pay boost last year). And while reports of riots and scalping follow many of Apple’s launches in the country, if you don’t have the money to pay for the phone, you don’t get the phone. Or do you?
Along with Cook’s visit to China, Apple kicked the new year off with the announcement of a new payment plan, allowing would-be iPhone and MacBook owners to buy online with multiple payments over an up to two year period. To push the initiative, customers who sign on to one year or shorter plans before January 23 will receive interest free payment plans. The plan requires the customer to hold a credit card with the China Merchants Bank Company. As of yet, there is little news on how the scheme is going.
With today's announcement of a Chinese New Year sale to be held only in Asia, there can be no doubt that Apple has come a-courting and it is bringing a big box of chocolates.
Ending 2012 with a Thud
While we don't know when Cook's visit was planned, events at the end of 2012 most likely added to the urgency of the visit. A month prior to the visit, the IDC released a report that dropped Apple’s place in the smartphone market down to 6th from fourth in the previous quarter. A 25% drop in stock shares following the US launch of the iPhone 5 did little to add to the end of the year cheer, with fluctuations in the stock price continuing.
In China, the lackluster showing by the iPad Mini and the drop off in sales of the iPhone 5 after strong initial sales of two million phones in the launch weekend have Apple searching for alternative entries to the Chinese market.
One such alternative comes up repeatedly in the form of China Mobile, the largest mobile operator in the world in terms of subscribers. Cook met once again with leaders of the Chinese telecom during his most recent visit, but no deal has yet been confirmed in the face of reports that China Mobile is demanding profit share.
Apple is currently carried by China Unicom and China Telecom, the country’s second and third largest mobile providers.
If Apple wants to get serious about the Chinese market, it is going to have to make sure that its products meet that country’s needs. With users complaining of poor experiences texting and using Siri and limited access to 4G networks, Apple needs to rethink if the user experience that has stood them well in the US translates to China.
And of course, it would be difficult to look at Apple in China and only consider the consumer side. The manufacturing of Apple products in China has received a lot of attention and not of the positive kind. In spite of the recent announcement that Apple will be moving some manufacturing back to the United States, China is and will continue to be its main source of manufacturing.
The company adopted an auditing program and joined the Fair Labor Association in reaction to criticisms of working conditions, safety and employee treatment in manufacturing facilities in China and has made some improvements. But as critics have noted, in spite of the threat to discontinue working with companies that violate the Supplier Code of Conduct, Apple reports show that in most circumstances, this threat is rarely followed through on.
In a follow up article in the New York Times on working conditions in Apple factories, authors Keith Bradsher and Charles Duhigg note that, "Even with these reforms, chronic problems remain.”
Numbers from Apple's report corroborate that there is much work to be done. In the ratings for Occupational injury prevention, the numbers were not reassuring: Procedures in compliance received a grade of 65 percent and management systems in place followed with 59 percent. Last I checked under 69% was a failing grade.
With such large areas for improvement in the supply chain and one of its major contractors, Foxconn, being investigated on bribery charges in China, combined with reports of a shrinking workforce, Apple might have to rethink more than just its sales approach in China if it really wants to be number one.