Apple Takes on China

OCTOBER 15, 2013

By Michael Stone

Apple’s iPhone has a China problem.

The fact that the Chinese market is one that Apple simply cannot afford to ignore shouldn’t surprise anyone. China’s population – and its subsequent potential market – is booming. And Apple’s not ignoring it. Last month, it was announced that Apple’s new iPhones are licensed to work on China Mobile’s network. This opens up Apple to the world’s largest mobile phone company in terms of subscribers.

Yet as a product, the iPhone has yet to successfully crack the China market. As of August 2013, Apple’s share of China’s smartphone market had dropped from 5th to 7th. Leading Apple were Samsung, Lenovo, Yulong, and others. Experts suggest that this is the result primarily of the iPhone’s high cost.

In order to find success, Apple has two options: lower the price point of its iPhone or use its powerful brand to draw in consumers that are willing to pay more.

The lower price point and what this could mean

With regards to a lower price point, media speculated, but Apple did not deliver. At the botched iPhone launch event in Beijing, it was revealed that the ‘cheaper’ iPhone 5C is still going to cost over $700 in China. This is more than the average monthly urban income in China and about double the cost of mid-tier devices from Samsung and other vendors. The price might still go down, some argue. But it probably won’t become as affordable as other smartphones.

This is a challenge on a number of levels. To paint the scene with broad strokes, the Chinese market expects, and happily uses, cheaper smart phones. With a more expensive product, Apple loses participating in a massive potential market.

They also lose people who could one day become Apple consumers. Recruiting new consumers is more difficult than retaining them. Once a consumer chooses another smartphone, it will be even more difficult for Apple to lure them away.

To explain what I mean, let’s look at licensing. In licensing, there is a concept of upstairs/downstairs. Oftentimes a luxury brand will license a “bridge line” designed to “hook” customers at a lower price point and then slowly bring them up to the luxury item. We see this in fashion. Think of Marc by Marc Jacobs, DKNY for Donna Karan, CK for Calvin Klein, just to name a few. Fragrances have also historically done that for luxury brands. One might start with Tom Ford cologne and then graduate to a Tom Ford suit.

To some extent, Apple’s new iPhone 5C could have done that. If it provided a lower price point, it could have been used as a tool to create new brand loyalty and engage new users. These users could have, at some point, upgraded to a more expensive model. At least Apple would have had a loyal brand consumer.

Yet is the iPhone’s price right? Reviews and media reaction seem to suggest that it’s not. As I mentioned above, it’s still very, very high for most individuals in China.

So, we need to consider the second option: brand value.

The power of brand for Apple

A lowered iPhone price point doesn’t seem to be in the cards for China. So here’s where brand comes in.

Today, Apple is one of the most recognized and beloved brands in the world, consistently ranking at the top of global league tables.

Simultaneously, as the economy in China strengthens, there is a slow but noticeable transformation taking place. According to the Millward Brown, “BrandZ™ Top 50 Most Valuable Chinese Brands 2013” survey, consumers are paying more attention to brands (Western luxury brands are gaining traction in China). They are increasingly buying products and services for reasons other than price. They, as other consumers around the world, trust well-known brands. Chinese consumer sophistication is maturing and successful brands are those that understand the shifting tastes across this nation.

The deal with China Mobile, the number one brand in China, is going to open a whole new group of potential customers. Within this group are those who will be willing to invest in Apple as a higher-priced, mid-market item. In the same way one might purchase a nice watch or a smart bag, one might buy an iPhone. The phone becomes more than a device – it becomes a tool banking on the power of the brand. It also becomes a status symbol.

I’m not saying that being an ‘aspirational brand’ will fix Apple’s China problem. Apple has long been perceived as cool, trendy, and as something to save up for. Despite this, it’s still struggling in China.

Rather, I’m saying that with the opening up of China Mobile’s subscribers, Apple’s brand is only going to become more important. It’s how Apple could make China work if it remains inflexible on price.

What this all means

We’ve seen that licensing credible brands in China successfully usually takes a combination of the two elements mentioned above. They combine the appropriate price point (often with the ‘upstairs/downstairs’ element) with a strong brand identity. The same holds true of any brand, licensed or not.

My instinct is that Apple will find a way to succeed in the Chinese market. What I’m not sure about is the extent of this success. Will they continue to rank low on the smartphone charts? Will they be beat by competitors with less trendy brands, but better prices or bigger screens? Or will Apple find the right price with the right brand, and take China by storm?

In my mind, one thing is for sure: in the battle for more of the Chinese mobile phone market, Apple’s brand prestige is going to become increasingly important. Apple must continue to promote its ‘aspirational brand’, and prove that innovation will continue in order to inspire. It’s these elements that will cause Apple to draw in and sustain a relationship with the consumers who will support it.