Apple iPhone's China Problem

Posted by: Olga Kharif on November 03, 2009

Apparently, China is impervious to Apple iPhone’s charm. Apple’s local partner, China Unicom, has only sold 5,000 units since the iPhone debuted in the country last week, according to reports. What’s going on? Some observers blame the iPhone’s high price. But consultant iSuppli points fingers at a different culprit: The Chinese gray market for the iPhone.

Tiny only a few years ago, China’s gray market is now huge, it now accounts for nearly 13% of all legitimate global cell phone-sales. And total gray-market handset shipments are growing fast, expected to reach 145 million units in 2009, up 43.6% from 2008, according to a Nov. 3 iSuppli report. In contrast, worldwide unit shipments of legitimate cell phones will drop 8% this year, according to iSuppli. “Chinese gray-market handset suppliers have become so successful that they are grabbing share from major international handset [manufacturers],” says Kevin Wang, director, China Research, for iSuppli. And Apple is one of the manufacturers suffering as a result. While Apple waited to introduce the iPhone into the Chinese market, Chinese gray market vendors have filled in the gap with cheaper iPhone-like devices. So now, the locals see no need to rush out and buy the real thing.

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Reader Comments

Alan Davis

November 3, 2009 07:14 PM

Written by an inexperienced reporter with not a lot of business background. This article should be given very little credence.

Haohua Huang

November 3, 2009 07:25 PM

Please don't mislead. The cheaper iphone-like devices doesn't have the full functionality as the iphone itself. The ones wants iphone won't buy the "fake" one. The price and lack of wifi should still be the reason.

Practial_Econ

November 3, 2009 07:32 PM

"Cheaper iPhone-like devices" Correction - you mean exact ripoffs and mini sized rip offs for as little as $100. These are coming out the back door of Apples suppler/manufacturer. I've seen these repeatedly over the past year. My most recent hired driver thought it was hilarious that he could buy a mini-iPhone copy for $100. It was kind of an up your a_ _ to the good old USA.

bobbygreg

November 3, 2009 07:37 PM

How about the fact that most folks here don't like China Unicom, and prefer China Mobile instead?

Or, that you can easily get a real unlocked Cellphone here for less than what Apple/Unicom offers, and then use it with China Mobile?

Don't you guys talk to folks who actually live in China before "reporting" this stuff?

btw, checkout this blog entry from October:

http://www.nomadicminds.org/blogs/2009/09/27/iphones-china-play/

And, Sin-Yaw isn't even a "consultant".

Nicolas Martin

November 3, 2009 07:39 PM

America is tied up in knots by intellectual property laws. Chinese markets are often more competitive, and consumers are the big winners.

high eagle

November 3, 2009 07:41 PM

yes and no. the fact of the matter is that most of the people crazy for an iPhone has already had one. this is the biggest gray mkt that affects the iphone sales.
on the street, you could see people use the iPhone (real ones) very common. so the conclusion must be those who really want one has already had one.

John

November 3, 2009 07:50 PM

I have been living in China for a couple of years now. Lots of my friends have had iPhones for a long time. Mainly from HongKong. There are also lots of fakes on the market. The people that wanted iPhones already have them.

John Wells

November 3, 2009 08:08 PM

The real reason is that in the larger cities, Unicom is unpopular -- we consider it to have poor network coverage, and the 'word on the street' is that voice calls are less reliable with frequent drop-outs.

Whether this is actually true or not remains to be seen, but with such huge population densities in cities, call reliability was a real issue in the early days of wireless services -- and reputations were won or lost years ago.

MinskyMoment

November 3, 2009 08:11 PM

The iphone in China costs more than 1000 dollars without a service contract. The per- capita GDP of China is 6000-7000. The grey market vendors are successful because their prices are reasonable.

Stanluca

November 3, 2009 08:19 PM

I just don't think the average Chinese can afford the $800 USD that China Unicom is charging for the iPhone without contract. That is even more than in the US where the per capita income is about 10 times as much.

jeezy

November 3, 2009 08:43 PM

that sucks for apple

reader

November 3, 2009 08:46 PM

chinese consumers are value seekers. as a chinese, i see iphone as an over priced, and not the most functional gadget. there are many phones in the so called "gray market" that offer much better value for less money. there are many apple fans there; but there are even more who think apple is just arrogant.

reader

November 3, 2009 08:46 PM

chinese are value seekers. as a chinese, i see iphone as an over priced, and not the most functional gadget. there are many phones in the so called "gray market" that offer much better value for less money. there are many apple fans there; but there are even more who think apple is just arrogant.

Jordan Eilbert

November 3, 2009 08:54 PM

Actually it shows to me that China's populous is very tech Savvy. I wouldn't touch an Unicom iPhone until they enable the Wifi either.

Traveler

November 3, 2009 09:04 PM

The author of this article dies not understand what a grey market import is. Grey market devices are authentic devices that are designated for a different market. This differs from counterfeit devices, or potentially trademark or patent infringing devices (knockoffs) that the author refers to in the article.

Simon

November 3, 2009 09:50 PM

Partly agree with you.I am from China.We was expecting the iPhone debute but actually the price tag is too high for us.And if we can get much more cheaper iPhone smuggled abroad,why should us turn to such expensive iPhone while 3G service is not mature righ now?

Kevin

November 3, 2009 10:19 PM

China's gray market has been huge for years; it's not a recent development. Being an "observer" myself, I would attribute the iPhone's lack of sales in China attributable to the high cost and no wifi; why buy a crippled model when you can have the real deal for much cheaper.

Dust

November 3, 2009 10:25 PM

That's not the case...

Long before its 'official' introduction, iPhone has been available in the mainland China market, yes, in the so-called 'gray market', through retail channels in Hongkong. I don't have statistics, but I believe number of iPhone sold in mainland China is in the order of hundreds of thousand, or even millions.

So to speak, last week's event was not a debut, no wonder the poor sales figure.

Christian

November 3, 2009 10:43 PM

Hardly. Many "gray market" iPhones are not knock-offs, but the real thing imported from Hong Kong.

Apple is has sold approx 1 million iPhones in China-- just not through China Unicom.

In fact please look at a recent PC World article describing how China Unicom is offering "gray market" iPhone users "amnesty" to bring in their gray market iPhones for service contracts and 3G connectivity. You think they'd be doing that for knock-offs? Please.

C'mon Olga, you can better.

Randy

November 3, 2009 10:55 PM

Impervious? Nay I say... Smart move on the Chinese Citizen buyers part. I wouldn't have bought three iPhones and the iPod Touch if they didn't have WiFi either. Some day the Chinese will have iPhones to buy that aren't crippled.

bn

November 3, 2009 10:58 PM

In addition, the retail iphone has no WIFI.

Blake

November 4, 2009 12:14 AM

The reason for the fumble is that the China iPhone does not have WiFi. The gray market iPhones do. Chinese consumers would prefer to buy iPhones in stores rather than on the street, but they don't want to pay a premium price for a gutted product.

Nick67

November 4, 2009 12:14 AM

It's nice to know that some folks are immune to the RDF. The only thing Apple has ever done well is marketing. They're gods at that--but apparently not in Mandarin and Cantonese.

adesh sidhu

November 4, 2009 12:15 AM

This is the same problem wich iPhone faced in India. Extremely high price and penetration of cheaper iPhones from grey market has not allowed iPhone to become even a marginal player in India's growing telecom sector.

Robert Stodieck

November 4, 2009 01:19 AM

Gray market phones?! No way! My friends in China have had actual imported and "liberated" iPhones for years. They aren't buying what they already have. Gray market phones sell to a completely different market segment.

Golib Kholjigitov

November 4, 2009 01:49 AM

Gray products are more popular in poor and low income countries, this is not a widespread disease. As time passess by and poorer countries get richer demand for gray phones will gradually vanish. I mean have you seen those gray phones, they are fake and low quality. As a saying goes, the stingy pays twice.

yong gao

November 4, 2009 02:03 AM

I think the really reason is that the price of iphone is too high! Why people like the Shanzhai handset? they are cheap and powerful.

b

November 4, 2009 03:05 AM

maybe they should have thought twice before locating all of their manufacturing in a country known for counterfeiting

Yang Gao

November 4, 2009 04:49 AM

The linked "gray market vendors" point to iPhones bypassing Apple's restrictions, while the author of this article refer to them as knock-offs. Get the facts right, please, or at least make the stupid error less obvious.

Qiuzhuang Lian

November 4, 2009 05:10 AM

Yeah. Make sense.

Hello World

November 4, 2009 05:12 AM

Charging over $1000 USD when their average income is how much? and blaming Gray market for everything? that is funny

Jon T

November 4, 2009 05:19 AM


It won't take long for the genuine iPhones to be recognised.

The Win Mobile lookalikes will be headed for the garbage heap.

G

WhenThinking

November 4, 2009 05:21 AM

5000 phones in three full days of selling equals a pace of 50,000 phones per month or 600,000 phones per year. That's without added momentum via price drops, additions of new features such as wifi, and the possibility of restrainig gray market sales. Recall the pricing trajectory in the united states market from initial launch going forwards. Prices werenot 99, 199, & 299 usd: i think the base unit was over/around 650 usd and that was followed by price drops to strategically accelerate sales.
Every analyst or reporter that has forecast a product problem for apple in recent years has been proven wrong each time and has had to eat his/her own words. Not good if your business is journalism or analysis.

Darth

November 4, 2009 05:34 AM

Haha, right... It has nothing to do with overpriced brick, it's all about copies of iPhones around there.

Does this means that copy is as good as the original, if not better...

If I were them, I wouldn't say such things in public :)

Chinaski

November 4, 2009 05:37 AM

The iPhone flopped miserably also in Russia and India, and it is not such a hot thing in Japan or even Europe either.

In the US the iPhone is apple pie, troops, Babe Ruth and God combined, but in the rest of the world the hype just is not there.

One size does not fit all.

Blame the gray market, but there is more to it.

phil

November 4, 2009 06:07 AM

Whether customers buy their iphones from China Unicom or the "grey-market" Apple still gets the profit from the phone itself. They may forgo the carrier monthly subscription fee but the iPhone itself is the biggest profit boost for apple. So this is NOT a big problem, just the consumer voting to fix a bad choice of CU/China to launch a wi-fi disabled iphone.

In the end Apple grows market share in China and the iphone sales numbers go up in the rest of Asia (which is really suppling the grey-marketeers in China).

Murali

November 4, 2009 06:21 AM

If counterfeiting is the problem how do you explain the failure of iPhone in India? Could it have anything to do with Apple's practice of NOT selling the phones without linking them to the wireless service providers? Even with the two major operators offering iPhones,the sales have been 5000 or so after one year. In these markets consumers hardly ever buy the hardware from the operator while buying a connection.Tying a hardware to an operator is thus doomed to fail.
But Apple being Apple, expects the world to change itself to fit into its business model and not the other way round. Good luck to them.

K Ballard

November 4, 2009 07:26 AM

Gray markets and counterfeit products will continue to grow in China. At some point the Chinese government will actually move to shut it down, but only after there are "significant" deaths or income losses to Chinese firms. So much money is being made off fake products, corrupt government officials will still try to limit prosecution.

Ferhat Savcı

November 4, 2009 08:17 AM

iPhone look-alikes with crappy touch screens, great analog TV, better cameras than the original iPhone's, quad band, dual SIMs, and names like HiPhone or iFone are the rage over there. Price is around 70-150$, depending on build quality and features like video recording from analog TV.

The likeness is limited to the physical design. iPhone being a stylish phone, more than it is a smart phone, I think the Chinese have got it right.

zak

November 4, 2009 08:29 AM

I'm sure the same would happen in any country that has been held off for so long, no doubt that everyone in the country that can afford/use the iphone already has an unlocked one or as mentioned, the knock off. I'd guess Apple had a reason for the delay? Like they figured the sales woulda been low either way?

Johnny Mac

November 4, 2009 10:48 AM

Let the trade war begin.
Tariffs based on wage differentials.
Ban products from companies engaged in ripping off intellectual property.
MFN trade status? Forget it.

Stop loaning the money, setting up the machines to make it, and teaching the communist how to tie the ropes around our necks to hang us with.

Yeah, I said it, communist, that is what they are, the enemies of capitalism.

Oh yeah, how about putting their currency on the international market.

Want a slogan?

"America for Americans!"

There are more people that feel this way than you can imagine.

dj

November 4, 2009 10:58 AM

i dont care about the brand name or gray market,as long as the "functionality" fits me, and that's totally subjective. chinese cell phones have more functionality than iphone, again, wholly subjective. i like dual or even triple standby sims/batteries, and sorts of other features, hate iphone's "lock down" canned user experience. to me, getting 3 gray phones that work to my likes is better than 1 high priced phone that provides manufacturer's preference over mine.

Rj

November 4, 2009 12:44 PM

Sell a Ferrari in a 3rd world country and of course the sales is low. Does that mean you should not sell there.

I seen many fakes in China. They are just dumb phones that people buy because they cannot afford the real thing. The machines are totally not the same.

Ben

November 4, 2009 01:36 PM

Apple chose a lousy wireless company in the USA (AT&T). By going in for an exclusive deal they lost the ability to get market share. I wanted a I-phone but went for a blackberry because I wanted to stay with T-mobile USA. Apple again screwed up by going with wireless company that many Chinese don't like. Apple makes great products but has lousy market strategy. I am happy with a blackberry and will never consider an I-phone for replacement. As a shareholder in Apple, I am disappointed with the Apple leadership team's lousy market strategy.

g2_ok

November 4, 2009 02:07 PM

The problem with the iPhone-Apple business model is that it is tied to iTunes which is not used much in India and China. The phone is just too locked down by carrier. Apple basically has no market in these 2 huge countries whether it be computers or mobile phones.

BeijingMan

November 5, 2009 12:35 AM

Hot, Cupertino is going towards 0,2% market share in China! They forgot to do their home work re. business in mainland China.

JDR

November 6, 2009 10:51 AM

Let me first state my dissatisfaction with quality of this article. Did Olga get a job because her dad is on the board of McGraw-Hill? My goal is not to be callous in any way but this article is simply poor reporting combined with an amateur level of writing skill. It was a struggle to even read the 13.5 lines that were written.

As far as the actual content of the article: I agree most with a previous comment that stated "Don't you guys talk to folks who actually live in China before "reporting" this stuff?"
To state that people are buying "knock-offs" in place of real Iphones is simple blasphemy. These phones do not rival the Iphone in any way and are not a substitute. I just recently moved back to NY after living in Hong Kong for almost a year. I'll tell you exactly why the Iphone does not do as well in China.
1) The Iphone is unbearably expensive relative to most other cell phones available in China. The purchasing power of the general population simply is not anywhere near the level in the United States (yet).
2) More importantly, the buying process of Chinese consumers is totally different than that in the United States. In the US, we are used to the standard: sign a two year contract or else you end up with a "go" phone that will break within the week. We are then stuck with that specific network and can only use phones that run on that network.
On the other hand, in China they are used to buying any phone they want and then simply buying a SIM card to hook it up to a network. Basically, one can buy any phone regardless of who makes it and turn around and hook it up to any network they deem fit. In essence, the network has become a commodity in China (as is rapidly happening in the US). Apple should have realized that Chinese consumers do not want to be hooked to a specific network without an option to change. They also are not used to signing long-term contracts for cell phones. Simply put, the cookie cutter approach to international expansion does not work. Apple: do your homework before moving into a new country.

I can be reached at jdrishe@gmail.com
-Joe

Get Real

November 14, 2009 12:26 AM

All you Apple Fan Boys are MAD because Iphone Launch in China has been a flop. Don't get mad at the writer of this article.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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