To Crack China, Apple Needs More Than Cheap iPhones

When Apple reports its quarterly earnings after the markets close Wednesday, investors will be looking for clues about how Chief Executive Tim Cook plans to cope with the company’s challenges in China. In the world’s largest telecom market, Apple has not only fallen far behind arch rival Samsung Electronics (005930), it also lags behind Lenovo, a PC company that just two years ago was barely even in the smartphone business at all.

Adding to the indignity, Apple (AAPL) is also behind an even less-known brand called Coolpad,  which is owned by Shenzhen-based China Wireless Technologies. As my Bloomberg News colleague Edmond Lococo and I reported Wednesday, Coolpad has become the No. 3 brand in China, behind only Samsung and Lenovo and well ahead of Apple, thanks to its focus on low-cost smartphones.

The below-$ 200 market segment is growing fast in China but it’s one that Apple has long ignored. The cheapest iPhone on Apple’s China website, an 8-gigabyte iPhone 4, costs 3,088 yuan (or $ 495). The latest iPhone 5 starts at 5,288 yuan ($ 850).

A cheaper iPhone might help Apple address that problem and take down upstarts like Coolpad. As Bloomberg has reported, Apple is working on a low-cost iPhone priced between $ 99 and $ 149, with China and other developing markets the target.

But selling more gadgets is just one of Apple’s China challenges. Another is getting Chinese to pay for things on iTunes. China is notorious as a piracy playground, and with counterfeit CDs and DVDs so easy to buy in the markets, and unauthorized music and movies so easy to download from the Internet, relatively few Chinese can be bothered buying from an online service. And even if they wanted to pay, they wouldn’t have the chance; Apple doesn’t sell music or movies in China.

Apple is trying. There is a Chinese iTunes store that offers apps, although most of the popular ones are free. Suppose you’re in China and you want to buy a game app for your iPhone or make an “in-app” purchase while playing a free game. Until last year, you needed a credit card from the U.S. or another Apple-blessed place to buy from iTunes. Now Apple has started a local version of iTunes for people with Chinese credit cards.

Still, it’s not easy to be loyal to iTunes in China. First of all, the servers are not in China, so the service is slow. Also, any would-be shopper must prepay to buy from China’s version of iTunes. If you haven’t put money into the account, you can’t buy anything. That makes impulse shopping very difficult. And unlike Android users, iPhone owners can’t just make purchases and have the charges show up on their mobile-phone bills. China’s cellular operators last year starting offering that service for Android, greatly simplifying the purchasing process. Apple doesn’t have anything comparable yet. Perhaps that’s one of many things on Tim Cook’s agenda when he met this month with Xi Guohua, the chairman of China Mobile. — Top News

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