What Apple is doing right in China

Jan 28, 2015 11:48 AM by News Staff

When it comes to China, Apple (AAPL) is making all the right moves.

The American technology giant reported record financial results on Tuesday, partly thanks to its efforts to make headway in China. Despite a spotty past record, Apple was able to gain market share and, for the first time, led in smartphone unit sales in the country during the fourth quarter, according to research firm Canalys.

Its surging popularity in China is all the more remarkable when one realizes that its iPhone products cost about twice that of competing handsets. While China's average household income stood at only $2,100 in 2012, that fails to reflect the wide gap that's separating the country's urban nouveau riche -- who have the resources to shell out the local cost of almost $900 for an iPhone 6 -- versus its less affluent rural citizens. Its new iPhone 6 Plus has played into consumer preferences for phones with bigger screens, which helped attract new Chinese customers, Canalys said.

"The people in China are experimenting with luxury goods," Murillo Campello, a professor of management and finance at Cornell University's Johnson Graduate School of Business, told CBS MonyeWatch. "Apple now sells more iPhones there than in the U.S., and that won't be reversed."

One potential pitfall, however, is the strengthening U.S. dollar, which could diminish profit margins, and also make the phones more expensive for Chinese consumers, Campello added.

"While Chinese smartphone vendors are quickly gaining ground internationally, Apple has turned the tables on them in their home market," Canalys said in a statement on Tuesday. "The company is finally riding the large screen and LTE trends in China, which have been vital to its success."

Apple has also shut down "gray exports" from Hong Kong, cutting out smuggled iPhones, according to Canalys. Last year was the first time that Apple included China in its global rollout for its new phones, eliminating a previous three-month lag, Bloomberg News noted last fall.

The company saw "absolutely phenomenal" excitement in China around its introduction of the iPhone 6 and iPhone 6 Plus, chief executive Tim Cook said on a Tuesday conference call to discuss its quarterly results. Apple is expanding its retail store presence in China, and also growing its online sales channel.

"We're growing the number of stores. We'll hit 20 soon and we're doubling that by mid-2016," Cook said. He added, "Our online store has expanded to over 350 cities now. And in fact, our online revenues in China last quarter were more than the sum of the previous 5 years."

Samsung, whose large-screened Galaxy line has been popular with Asian consumers, made a miscalculation in China by focusing on selling older, cheaper smartphones there, according to CNET. It turned out that Chinese consumers wanted fancier phones, helping Xiaomi gain a foothold and grab market share from Samsung and Apple. Xiaomi, which means "Little Rice" in Chinese, has drawn complaints from Apple that it's ripping off the American company's designs.

Chinese consumers, though, are paying up for the iPhone 6 because it's a status symbol among the well-heeled. Apple's phones also gained attention in other Asian countries, something I witnessed on a visit to South Korea last November, my new iPhone 6 Plus in hand. Despite being in Samsung's home turf, my iPhone 6 Plus gained the attention of several people in Seoul, one of the most smartphone-connected cities in the world. As I was walking down a crowded street, one young man spotted it from several feet away. "Is that the new iPhone?" he asked me. When I nodded, he answered, "I'm so jealous!"

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