By LORETTA CHAO And YUKARI IWATANI KANE
Apple Inc. is getting closer to offering the iPhone through China's largest mobile carrier, state-owned China Mobile Ltd., giving the company access to hundreds of millions of new customers.
The effort is Apple's latest move in the risky Chinese market, which could play a central role in the company's growth plans.
Apple, like other American companies, is walking a tightrope in China's state-managed economy. It has long used Chinese factories to assemble its gadgets. But recently, Apple has begun targeting China's growing consumer class, opening its first retail stores and marketing its products, from Mac computers and iPad tablets to its iPhone.
Apple's role in China will expand greatly if China Mobile begins offering the iPhone. The iPhone has been available in China through the country's second-largest carrier, China Unicom (Hong Kong) Ltd., since 2009. But China Mobile, which is the world's largest carrier, has 600 million subscriber accounts, compared with fewer than 200 million at China Unicom.
Still, many challenges face Apple, such as government technical requirements that phones use an unusual wireless Internet technology, and the huge market for gray- and black-market electronics, where users can easily buy modified iPhones from overseas as well as fake iPads.
Tim Cook, Apple's chief operating officer, last month visited China Mobile's offices in Beijing. Both companies declined to comment on Mr. Cook's rare visit, but the carrier confirmed the two companies are in talks about the iPhone. An Apple spokeswoman said the Cupertino, Calif., company's strategy is to offer the phone to as many carriers as possible.
Based in Cupertino, Calif., Apple has historically focused on its home U.S. market, with the Americas region generating 38% of the company's $24.7 billion of revenue in the March quarter. But Apple is again expected to post strong China sales Tuesday when it reports earnings for its June quarter. Indeed, China is already Apple's fastest-growing region in terms of sales, despite the fact that the company has opened only four Apple Stores in the region.
Apple's push into China comes relatively late, a timing issue that has its costs. Other companies, from Hewlett-Packard and Dell to Nokia, Samsung and Motorola, have long been investing in China's booming mobile and PC markets. Apple faces strong competition from these companies, which already enjoy healthy brand recognition, as well as from other firms such as HTC, Huawei and ZTE. The latter two are making inroads with inexpensive smartphones that sell for less than $150.
Over the past decade, China has become one of the world's most important consumer markets because of its sheer size and fast-growing economy, which surpassed Japan this year to become second in the world. Luxury brands like LVMH Moët Hennessy Louis Vuitton have reported a boom in demand. China overtook the U.S. as the world's biggest car market in 2009.
Each day, tens of thousands of people stream through Apple's quartet of stores. Apple's revenue from Greater China, including Hong Kong and Taiwan, nearly quadrupled to just under $5 billion for the six months ended March 26 from a year earlier, though the region still comprises less than 10% of overall revenue.
Apple's strategy in China so far has been to maintain its prices—and profit margins—by targeting upscale shoppers. It doesn't discount and in some instances Apple gadgets cost more in China than in the U.S.
The iPad tablet starts at 3,688 yuan ($570) in China, compared with $499 in Apple's home market.
Both the iPad and the iPhone 4, which costs 5,999 yuan in China without a contract, would be a luxury for many Chinese consumers. The average household income was 12,076 yuan in the first half of this year, according to China's national statistics bureau.
It's unclear whether Apple will try to target a broader range of Chinese customers, many of whom prefer to buy prepaid phones. Mr. Cook said in an earnings call in March that Apple "wanted to understand the market and understand the levers there."
Despite its popularity, Apple still has a tiny portion of the Chinese computer market. It is fourth in the smartphone market, with about an 8% share, partly due to its October 2009 entry into the Chinese market.
Apple's retail stores in China have more than 40,000 visitors per day—four times the average traffic in their American stores. Apple Chief Financial Officer Peter Oppenheimer said earlier this year that the company's existing China stores had both the highest traffic and the highest revenue on average of any Apple stores in the world.
But the company's existing China stores sit in some of the richest districts in two of China's most affluent cities. As the number of stores grows it could be difficult to match the performance they have had so far.
Overall, China represents a big—and relatively untapped—opportunity for Apple.
"China has the potential to become the second largest and perhaps even the largest market [for the company] over time," said Shaw Wu, an analyst with Sterne Agee in San Francisco.
The iPhone is likely to be offered through China Mobile in the next 12 months, analysts said. The timing of when the iPhone will arrive at China Mobile partly depends on whether Apple decides to offer the device for the carrier's homegrown technology standard, TD-SCDMA, or wait until the carrier rolls out a fourth-generation network called TD-LTE, which China Mobile has been testing in select cities.
The company faces growing competition from smartphones running on Google Inc.'s Android software.
The company's fifth and sixth Chinese stores are expected to open in Shanghai and Hong Kong in the coming months.
One typical Apple user in China is Jessie Cui, a 30-year-old in Shanghai who bought her first Apple desktop computer in 2003. She was so impressed by its design that she bought a Macbook, an iPod, an iPod Shuffle, an iPod Touch and an iPhone. "I want something different from what most people are using," said Ms. Cui, who is now eyeing an iPad.—Yang Jie contributed to this article.
Read more: http://online.wsj.com/article/SB10001424052702304223804576447963332660164.html#ixzz1Sw2EIinB