Apple fans consumer flames in China

By Kathrin Hille

If Apple needed an illustration of its popularity in the world’s biggest smartphone market by volume, it was given one this month in Beijing.

The US group suspended sales of all iPhone models through its retail stores in China after the launch of its latest model – the 4S – at its flagship Sanlitun store triggered a riot among black marketeers.

The bitter disappointment of thousands of people who braved subzero temperatures to queue outside the store overnight only to be told of the abandonment added to the chaotic scenes.

Such hysteria is an extreme example of the attraction of a device that drove Apple to record revenues of $46bn and record profits of $13bn in its December quarter.

Apple said on Tuesday it sold 37m iPhones in the last 14 weeks of the year and made the new 4S available in 90 countries for its fastest rollout ever.

Tim Cook, Apple chief executive, told an analyst conference call that Apple was making some progress in Brazil, Russia and India but China, among the Bric countries, was on a different level, with demand “staggering” and “off the charts”.

That was evident at the Sanlitun store on Wednesday as thousands of Chinese youngsters streamed in, seeking to spend some of the money they received from parents and grandparents for the Lunar New Year festival.

As usual, all spots at the long tables were taken, with children playing games on MacBooks and iPads as their friends and family watched.

Customers kept asking for the phones but sales staff had little comfort to offer. They advised consumers that they could order the iPhone 4S in Apple’s online store but it was out of stock now and there was no indication how long they would have to wait for the device.

People are also being directed to China Unicom, the only Chinese carrier that offers subsidised iPhones bundled with contracts. “Otherwise you may want to try at Buynow, [an electronics mall in Beijing], but you will probably have to pay a mark-up of Rmb1,000 ($158) at least,” said one sales employee at the Apple store.

Keeping supply scarce has been part of Apple’s strategy in China and in the past has helped fan the flames of consumer desire.

But, more recently, the hype has not been enough to keep Apple ahead of key competitors in the Chinese market and it seems to have genuine shortages, with the company admitting to a significant order backlog due to high demand.

While Apple’s share of the Chinese smartphone market more than doubled over the past two years, Samsung managed to increase its piece of the pie more than fourfold during the same period.

In the third quarter of 2011, Apple fell behind both Samsung and Huawei, the Chinese telecom equipment maker, as its share slid from 13.3 per cent in the June quarter to 10.4 per cent in the September quarter, according to Ovum.

This happened just as growth in the Chinese market gained momentum: China overtook the US as the world’s largest smartphone market with 23.9m devices shipped in the third quarter last year, almost 60 per cent up from a quarter earlier, according to Strategy Analytics.

Analysts say Apple’s main problem is the lack of other operator partnerships beyond China Unicom. The company is China’s second-largest mobile carrier by subscribers, with just under 200m, compared with the 650m subscribers at China Mobile, the market leader.

Apple has been in talks with China Mobile about a possible iPhone carrier deal for years. But the operator’s third-generation network runs on the country’s homegrown TD-SCDMA standard, which would require custom tweaks to the device, something Apple is reluctant to do.

The two companies are expected to aim at a deal for an LTE-compatible iPhone. But since commercial services in LTE in China are not expected until next year at the earliest, Chinese Apple fans may be facing another long wait for more affordable iPhones.