What is Apple up to in China?

Baruch, in this post: A new piece of information, augmented by local insight, that amounts to yet another upside case for Apple. And yes, it involves the iPad.

The new information: This past Thursday, Apple revealed plans to open 25 retail stores in China. Currently, there is one swish Apple Store in an upmarket outdoor Beijing mall, with one more planned in Beijing and two in Shanghai this year. Opening Apple stores in Chinese cities that most foreigners have never heard of (The likes of Shenzhen, Hangzhou, Chongqing, Chengdu, Kunming — there are 25 such cities in China bigger than Chicago) betrays a whole new level of ambition in the Chinese market, beyond just servicing creative elites in their international watering holes.

But what could Apple possibly sell in those stores that the Chinese can afford en masse? Let’s put that question aside for a moment and look at these recent observations:

  • My Chinese teacher, upon visiting my apartment, ogles my 17-inch MacBook Pro and 24-inch Apple screen. She goes so far as to run her fingers over the logo. “Made in China!” she beams. There is pride in the fact that Apple devices are made here, even if the IP comes from elsewhere. They are obviously built very well, which is more than you can currently say about Chinese-assembled cars or buildings. Apple computers may well be the most famous high-quality product coming out of China right now, and the Chinese know it.
  • Take a subway in China during rush hour and you will see few Chinese reading books or newspapers — the subway is far too crowded to claim that much personal space. Instead, more than half are pressed against their multimedia devices — hacked Sony PSPs, shanzhai touch-screen gadgets, or large-screen mobile phones — often scrolling attentively through long texts or watching soaps.
  • Luxury good brands usually tackle China by setting up shop in the most prestigious mall available and then running an ad campaign. These high-end malls are always empty when I inspect them, because very few Chinese right now can afford what’s on offer — but that’s OK: The idea is to stake one’s claim early as an aspirational destination, to be that symbol of success craved by the Chinese, so that when they do all eventually achieve success in droves, they will be preprogrammed to want that Mont Blanc pen in their Gucci bag slung over a Prada one-piece — just as we in the West have long been conditioned to want.
  • Luxury goods are easy to fake. Premium goods are not. As the world’s best fakers, the Chinese are well-positioned to appreciate that difference. Truly premium products (Audi, Nikon, Apple) are difficult to fake because their value lies in their superior functionality. Luxury goods are easy to fake because their prime function — to tell time, or to carry your makeup — costs very little. The rest is about conventional status messaging, wrought through expensive materials and labor, scarcity and branding — and these can easily be subverted to produce knock-offs. I suspect luxury brands will find they have a far harder time gaining a foothold in China than premium brands, because the Chinese are uncommonly pragmatic.
  • The Apple store in Beijing, on every occasion I have visited, is just as bustling as the ones in New York or London. I haven’t seen many computers being walked out the front door, but there is definitely a lot of experimenting with the display units, and the most popular items are iPod and iPhone accoutrements. (I have already explained why low official iPhone sales in China are nothing to worry about.) In short, the Beijing Apple Store is nothing like a luxury goods store in China. The focus is on transactions in the here and now.

Perhaps it is time to come to the gist of this post. For all the reasons above, I don’t think Apple’s move into 25 Chinese cities is the conventional luxury brand play for China, but a plan to sell them something that they can use, crave and afford today: Yes, iPads. at 499 USD, they are far cheaper than iPhones, which maybe 3 million Chinese have already bought without a subsidy. (I bought a Hong Kong factory-unlocked 16GB iPhone 3GS for 730 USD in Shanghai a few weeks ago.)

But why would the iPad be a success in China? Well,

  • Premium UI, multi-touch, battery tech = Hard to knock off.
  • Made in China = National pride.
  • 499 USD = Affordable to a middle class that is still a minority but huge in absolute numbers.
  • Long, crowded commutes = A compelling real-use case and an opportunity to show off.
  • iPhone OS = Best-in-class Chinese language support right out of the box. Far superior to any home-grown device — seriously.
  • iTunes = All those pirated mp3s and movies will work just fine on the iPad. (Don’t expect the Chinese to pay real money for their music or movies — ever. Sorry.)
  • App store = It’s just a matter of time before a third-party Chinese-language ebook app sells cheap literature.

The iPad is the first Apple computer many Chinese can afford. They will flock to it. You might even want to ask “why just 25 stores?” Apple COO Tim Cook has an answer:

“We are very, very focused on the quality of the point of sale and consumer experience,” Cook said. “We would prefer to move slow because we are building the brand for the long-term.”

Expect great things from Apple in China. Expect them sooner than you might think.

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7 responses to “What is Apple up to in China?

  1. A good observation. I watched the iPad presentation and I think it has a great future, and not just in the retail market. I conceived of two good commercial applications just during Job’s demo. After the presentation, I increased my Apple stock position.

    Twice I have borrowed a laptop to take on my travels, but found them just too heavy, clunky and awkward. For what I need to do, the iPad looks to be ideal; for many applications, I believe it will supplant the conventional laptop.

    Minutia: A better choice for a comparable automotive ‘premium’ brand ‘difficult to fake’ would be BMW or Mercedes Benz. Their powertrains and platforms are bespoke. Audi powertrains are shared within the Volkswagen Group and many of the smaller Audis are based on the generic VW PQ35 platform. Functionally equivalent knock-offs of these are available from the nearest VW, Skoda and Seat showrooms.

  2. Wow! Fantastic news and great insight.

    ps Difficult to make a knock-off of the chip the iPad uses, too.

  3. By any meaningful definition of ‘city’ (metropolitan area, urban area, etc), those sites show China has 2-4 cities bigger than Chicago. Sure, the population in Chicago’s incorporated area is less; but does anyone really think Chongqing, with 32 million people living in an area the size of Austria, is the largest city in the world?

    Your general point still stands, it just bugs me when people use meaningless numbers to make a good point stronger. Otherwise, good post, food for thought.

  4. Ben,

    Hmm, I thought I tried to be careful. Basically, I wanted to compare the wikipedia numbers of “List of cities in the People’s Republic of China by population” (http://en.wikipedia.org/wiki/List_of_cities_in_the_People%27s_Republic_of_China_by_population) and “List of United States cities by population” (http://en.wikipedia.org/wiki/List_of_United_States_cities_by_population), and if you take those two pages at face value then my comparison stands.

    But if those numbers are for different definitions of “city” then yes, you are right. But as you say, it’s a digression from the main point, one that perhaps I should have kept out for the sake of brevity.

  5. Leslie Young

    Dear Chris Pearson,
    You have a great blog.

    Please notify me of new posts via email.

    Thank You.

  6. Jacob Johansen

    ” I suspect luxury brands will find they have a far harder time gaining a foothold in China than premium brands, because the Chinese are uncommonly pragmatic.”

    Well my friend – time has already proven you wrong on this one. The Chinese are pragmatic but before that they want to show face and status hence luxury brands such as LV are ding really, really well (products walking out the stores in contrast to the Apple shops) LV already having more shops in China than Apple will in many years to come! And right behind LV is a que of other luxury brands doubling their revenue year after year in the Middle Kingdom.
    So: Luxury goods are already doing splendid in China. The iPad: Well it will be as dead here as the idea was from the very beginning. It’s basically just useless and as the Chinese are pragmatic they will buy a PC instead – just as they are today!

  7. Thanks for the great post. Very good observation. One minor flaw, as a Chinese of post-85′ generation, I can safely say that “made-in-China” is never a factor when we purchase a piece of consumer electronics – as we are aware that most of the major consumer electronics products are assembled in South East Asia. There’s not a single trace of national pride in purchasing an iphone assembled in Guangdong.