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.