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Apple embraces — and adapts to — China's vast potential

BEIJING — The store clerk polished the iPhone 4 as though it were a diamond. Then he reverentially handed it to Liu Jia.

"You have to have it. It's like religion," said Liu, a 29-year-old public relations manager. "I don't think a lot of people understand the essence of the iPhone, but it looks cool and it makes you a star in front of your friends."

Apple infatuation has arrived in the land of 800 million-plus mobile phone users.

The recent launch of the iPhone 4 in mainland China created a frenzy, with fighting breaking out among shoppers at Apple's flagship store, in a high-end shopping and bar area of Beijing called Sanlitun.

Shortly after the latest version of the iPhone officially went on sale Sept. 25, Apple's carrier partner, China Unicom, announced it had received 200,000 advance orders, even though the country is already swamped with "grey market" iPhone 4s brought in from Hong Kong and the United States.

Compared with Americans and consumers in other developing countries, relatively few Chinese lined up for Apple products. But the intensity of those who do underscores the importance high-end products have for newly wealthy Chinese, many of whom are willing to pay above suggested retail prices to get their hands on devices like the iPhone 4 before others do.

After years of effectively ignoring the country with the world's largest number of mobile phone and Internet users, Apple of Cupertino, Calif., is now aggressively courting Chinese consumers.

Part of Apple's new retail strategy is to open 25 stores in China by the end of next year, a dramatic increase from the four that now exist.

During the company's second-quarter conference call with analysts, chief operating officer Tim Cook said revenue for China, Hong Kong and Taiwan was nearly $1.3 billion — a more than 200 percent jump from the same period a year ago. Piper Jaffray analyst Gene Munster estimates China represents about 5 percent of the company's sales and expects that to double sometime between 2015 and 2020. And Apple's shares topped $300 last week, in part on investor excitement over its growth here.

Apple would not comment on its China strategy.

"It's critical that Apple is in China," Needham & Co. analyst Charles Wolf said. "There is a strong move toward conspicuous consumption, and that means there is a strong move to buy Apple products."

Like all infatuations, though, there is a risk the attraction is temporary — or that obstacles could impede a long-term relationship.

"Apple hasn't learned how to tackle markets that have very different characteristics from the United States," Shanghai-based Gartner analyst Sandy Shen said.

Among the difficulties Apple faces in China, for example, are competing with easily made iPad and iPhone knockoffs and marketing its high-priced products to a population that has a much lower income than in more developed countries.

"Apple will also face strong competition from phones running on Google's Android mobile operating system, whose aggregate market share is already higher than that of the iPhone in China, Shen said.

Apple embraces — and adapts to — China's vast potential 10/24/10 [Last modified: Sunday, October 24, 2010 4:30am]
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