An article wherein it is explained why everything written so far about Apple’s iPhone launch in China is beside the point.

Baruch, you know how hard I, Bento, try to refrain from commenting about Apple on this blog, but it appalls me how it’s been several weeks since the iPhone launched in China and still none of you pundits has caught onto Apple’s strategy here, not even accidentally through sheer volume of keyboard combinatorics. I think I shall help along the process a bit.

Apple is not selling iPhones in China because it wants to sell iPhones in China, but because it wants to sell iPhones to the Chinese. That’s a big difference. I’ll explain.

The Chinese have long had access to iPhones. They are for sale at stalls in every cybermall and market in every Chinese city, and come in two varieties: The most expensive ones (at around 6000 RMB in Shanghai for a 16GB 3GS, or 880 USD, depending on your haggling skills) come directly from Hong Kong, where the factory-unlocked model is available from the Apple store for around 4800 RMB. That’s a nice arbitrage play by the stall owner, and everyone is happy. The cheaper model, at around 5000 RMB for a 16GB 3GS, was originally bought locked in the US or Europe, and has been unlocked by the stall owner’s hacker-genius cousin using 3rd-party software. This kind of iPhone is cheaper, because you are on your own when it comes to upgrades and iTunes compatibility.

The distribution model is extensive and robust, and in fact most Chinese buy their mobile phones from stalls like this. There are no iPhone shortages, as prices fluctuate to meet demand. The received wisdom is that around 2 million iPhones are in the Chinese wild; I’ve personally seen a good many of them here in Shanghai, where they are much in evidence among the eliterati. Still, this is a minuscule portion of the 700 million odd phones in use in China, of which a small but growing portion is smartphones.

What can Apple do to grow the number of iPhones on mainland China? Short of lowering prices in Hong Kong (not going to happen) it can do two things: Increase awareness of the iPhone via advertising, and bring the benefits of a Chinese-language App Store to Chinese iPhone owners.

To do either of these, you sort of need to sell the product locally first, though. Apple can’t really go round putting up banners in Chinese tier-3 cities urging consumers to head for the local iPhone aftermarket. Unfortunately, an ill-conceived Chinese law forbids selling mobile phones containing wifi functionality (unless it is the wifi variety developed in China that nobody uses) so if Apple wants to sell iPhones in China, it has to first cripple them.

Why anyone would buy a wifiless iPhone beats me, especially if it is more expensive than the arbitraged unlocked Hong Kong model. Apple seems to think the same thing, because it is not revenue-sharing with China Unicom, the local vendor, but selling the iPhones outright to them. It is up to China Unicom to flog them in China.

And that’s what China Unicom is trying to do. China Unicom stores all have iPhone banners up; I’ve passed several China Unicom road shows stopping by Shanghai extolling the iPhone. The iPhone is being talked about widely. But so is the fact that the China Unicom iPhone is crippled — the Chinese are sophisticated consumers; forget this at your own peril.

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 anaemic.

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.

China Unicom will also be a useful partner for Apple to secure a Chinese iTunes App store. It isn’t there yet, in part because this kind of venture inside China requires the involvement of censors (and you thought Apple was an overbearing app gatekeeper…) but as per China Unicom’s own admission, the process is underway. Once such an app store exists, of course, anyone with a Chinese credit card and an iPhone will be able to partake, whether or not they bought the iPhone from China Unicom.

But I believe Apple is not just doing this to get advertising and an app store into China, important as this is for growing sales to the Chinese. I believe the intention is to pressure for a change to the law, simply by making the the absurdity of the situation so plainly visible. This is speculation on my part, but there is a precedent: Egypt.

In November 2008, the iPhone came to Egypt, but without GPS. That’s because there was a cold-war era Egyptian law on the books that banned civilians from possessing GPS devices. The law was unenforceable, with plenty of foreign-bought GPS-enabled devices in the hands of tourists and archaeologists and wealthy Egyptians. The only people suffering were the local vendors, which couldn’t sell anything with GPS in it. Apple garnered some criticism with this move, for kowtowing to authoritarian rule. But the GPS-less iPhone also put the spotlight on the law, making many people aware for the first time that Egypt was one of only three countries in the world where GPS use by civilians was banned. Egypt’s regime hates that sort of loss of face, and by April 2009, the ban was lifted. Egyptian iPhones these days come with GPS, but the win is for everyone in Egypt.

Is China up next? It’s now in China Unicom’s interests to have the anti-wifi law changed, so that they can sell a larger portion of the iPhones ending up in Chinese hands. That kind of incentive makes me optimistic. Apple has already cracked the Chinese market for wifi-enabled phones — via Hong Kong. Now China Unicom needs to do the same — by getting its owner to change the law.

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6 responses to “An article wherein it is explained why everything written so far about Apple’s iPhone launch in China is beside the point.

  1. My god, it’s you, Bento. I thought you’d been kidnapped by the Stupid Cartesians (Shanghai Chapter).

    And astonishingly, that’s a very interesting idea you have here. Lots of chagrin was expressed by Apple bulls when the measly official sales of iPhones in China were released. . . “oh no,” most of them said, “the Chinese just aren’t ready for smartphones” and other AAPL apologists, like Gene Monster at Piper Jaffrey, spent much ink trying to tell us it was OK, China isn’t that important anyway.

    The Android fanbois, on their part, used the datapoint as proof the global market for overpriced Apple kit was a 1st world phenomenon, and probably over-penetrated already and that the world was ready for cut price hardware with Android OSes.

    Clearly both are wrong. Althoughz in a wider sense, in seeing iPhones taking over the world, the Gene Munsters are also right. This is the group Baruch is temporarily allied with. 2m iPhones in China makes loads of sense. And that without any 3G in China at all. It’s impressive, innit?

  2. China Unicom actually has deployed 3G. A bit of background. China recently reorganized the wireless sector. The 3 players, China Mobile, China Unicom and China Telecom have each been granted 3G licenses. Each is only allowed to use one of the 3 flavours of 3G, namely:

    China Mobile: TD-SCDMA (the Chinese homegrown variant)
    China Unicom: UMTS/WCDMA/HSPA (which is what the iPhone uses)
    China Telecom: CDMA2000 (also used by Sprint and Verizon in the US)

    China Mobile, Unicom and Telecom have about 500, 150 and 50 million mobile subscribers respectively so China Mobile is clearly the heavyweight. China Unicom currently has about 1 million 3G subs

    http://www.reuters.com/article/rbssTechMediaTelecomNews/idUSPEK15698620091103

    The interesting question w.r.t the iPhone and all the other superphone players is what happens with China Mobile? TD-SCDMA is considered a bit of a boondoggle and doesn’t work very well. China Mobile and the Chinese government are looking for a face-saving way of moving past it and the likely path is TDD-LTE, a variant of LTE that they can migrate to with their current infrastructure (for complicated technical reasons, they can’t migrate to either FDD-LTE, which is what most everyone else will use, or HSPA).

    The way they’ll save face is by claiming that TD-LTE is a natural, next generation evolution from TD-SCDMA, which it isn’t really but that’s besides the point (LTE isn’t really an evolution from HSPA either, it’s a completely different wireless access protocol but it sounds nices to claim it’s an “evolution” from the existing technology).

    There’s no way Apple’s going to make a TD-SCDMA device so China Mobile won’t get the iPhone until there’s an LTE version, which is still several years away (Apple won’t build one until there are enough LTE networks out there). The first LTE devices won’t necessarily support TDD-LTE (you need more complicated radio hardware to support TDD-LTE and FDD-LTE). However, it would behoove handset vendors to support TDD-LTE if they want a crack at China Mobile. So the real iPhone action in China is still a few years away.

  3. re. China Mobile planning to move to TDD-LTE:

    http://www.unstrung.com/document.asp?doc_id=168194

    The upgrade to TDD-LTE shouldn’t be that painful. I’m working with one of the vendors providing the tower-top radio equipment for China Mobile’s TD-SCDMA network and I’m pretty sure that the hardware will support TDD-LTE. They still need to upgrade the base-band equipment at each cell-site but that’s a lot easier than climbing the towers to replace the RF gear. Also, Hauwei’s gear is supposed to support SW upgrade-ability and multiple standards which means that much (if not all) of China Mobile’s TD-SCDMA infrastructure may be software upgradeable to TDD-LTE.

  4. Ramster is right, China Unicom has begun rolling out 3G of the kind iPhones can use. Me, I’ve got my iPhone on China Mobile (corporate account, alas) but its Edge network is livable, especially if you have wifi to tie you over at innumerable internet cafes.

    BTW another great usability plus for the iPhone in China: The ease with which you can add a VPN tunnel to get your twitter/facebook/wordpress/youtube/blogger/RSS fix from within the great firewall — even over Edge.

  5. Great post! By gosh, I think you’ve got it.

  6. Bento -

    I am very curious as to your comment: “BTW another great usability plus for the iPhone in China: The ease with which you can add a VPN tunnel to get your twitter/facebook/wordpress/youtube/blogger/RSS fix from within the great firewall — even over Edge.”

    I take this to mean that the average Chinese citizen, owning an iPhone and using one of the 3 main 3G networks, can create a VPN and access the outer frontiers of the internet? The parts blocked in China? How does the government react to this, if at all?