China Becomes Part of Apple’s Core With iPhone
Li Wenhua, a 35-year-old school teacher in Beijing, left work early last week to buy an iPhone — even though she didn’t need it for work and wasn’t planning to use many of its features.
“A lot of people in my office use it and said I should get one, so I did,” Li said as she exited Apple’s Joy City Mall store. “I chose it just because it’s beautiful. I like the style.”
The must-have sentiment helps explain why China made up 20 percent of Apple’s sales and fueled a 94 percent profit surge last quarter. Hundreds of miles from Foxconn Technology Group plants where iPhones are built, shoppers in Beijing, Shanghai and other cities are flocking to the devices and making their country a centerpiece of the company’s growth strategy. Like Starbucks and Yum! Brands, Apple is benefiting from rising wages that give Chinese citizens more disposable income.
“China has an enormous number of people moving into higher income groups,” Apple chief executive officer Tim Cook said this week on a conference call with analysts. “There’s a tremendous opportunity for companies that understand China, and we’re doing everything that we can to understand it and serve the market as good as we can.”
Apple sold 35.1 million iPhones in the fiscal second quarter, an 88 percent increase from a year earlier, and higher than the average estimate of analysts surveyed by Bloomberg. That came after the January release of the most recent version of the iPhone in China and 21 other countries. China accounted for $7.9 billion of Apple’s $39.2 billion in sales in the period that ended March 31. In the first six months of this fiscal year, Apple’s sales reached $12.4 billion in China, almost matching $13.3 billion, the total for all of last year. Before the iPhone’s debut there in 2009, the company had less than $1 billion in annual sales in China.
“I don’t know of any other company that has driven its sales from virtually zero to $13 billion in a few years,” said Donald Straszheim, a senior managing director who heads China research at ISI Group in Los Angeles. “There’s a growing appetite for Apple products.”
Once considered a niche computer maker with a smaller international footprint than competitors such as Hewlett-Packard, Apple has used products including the iPhone and iPad to become one of the world’s biggest electronics makers. The Americas made up only 35 percent of sales last year, down from 48 percent in 2007. In the same period, sales in the Asia-Pacific region, which includes China, grew to 21 percent from 7 percent. Last quarter, international sales made up 64 percent of the total.
Sales in China and other countries last quarter helped make up for a drop in iPhone sales in the United States, where the new model went on sale in October. AT&T and Verizon Wireless, the largest US carriers, said iPhone sales fell last quarter compared with the previous three-month period.
In China, Apple sells its products from six company-run retail outlets and its online store, as well as a network of thousands of authorized resellers. Wireless carriers such as China Unicom (Hong Kong) and China Telecom also sell the iPhone. Lines of unauthorized sellers sell the company’s gadgets a short walk from its flagship stores in Beijing.
The appeal extends beyond the iPhone. Mac sales rose more than 60 percent in China last quarter, compared with 7 percent globally, Cook said this week.
Apple’s growth probably won’t slow any time soon. According to a report published last year by Credit Suisse Group, China may generate almost $30 billion in sales for Apple by 2015.
“They are just scratching the surface with China, with the iPhone being the highlight,” said Chris Jones, an analyst at Canalys in Palo Alto, California. “There’s still a tremendous amount of upside as they get more carriers and more points of sale in the market.”
Apple will get another boost if the iPhone becomes available on China Mobile, the world’s largest mobile-phone carrier, with more than 660 million users. China Mobile said last month that it and Apple are “working very hard together” on an agreement to have China Mobile carry the iPhone.
Even without a formal deal to provide an iPhone with a service contract, more than 15 million China Mobile customers are using an iPhone on the company’s 2G network.
To extend its appeal in China, Apple may need to add features tailored to Chinese users, said Nathan Washburn, an assistant professor at the Thunderbird School of Global Management, who studies business management in China. Siri, the voice-recognition software in the new iPhone 4S, doesn’t work with Mandarin, though Apple says the tool is coming this year.