Business Opportunity for Apples iPhone in China - Case Study Example

Business Opportunity for Apple’s iPhone in China Long serpentine queues are invariably witnessed outside Apple Stores whenever this iconic company launches a new gadget. What is noteworthy is that this phenomenon is not restricted to the United States alone. When the iPhone4, one of the many fantabulous products from the company’s repertoire was launched, fans across the world, lined up for hours on end to grab the technological marvel. Such frenzy is seen every time the California based behemoth comes out with a product innovation. Amidst this euphoria, the company realizes the fact that the domestic market, i.e. United States, has matured and cannot give it mind-boggling growth rates. Therefore, to increase its top line (sales), the company has to look for greener pastures abroad. Akin to Apple Inc., many other US companies have faced similar situations and have found the prospect of doing business in China extremely compelling. While there are umpteen options available when it comes to International business, China, more often than not, is the preferred destination for companies simply because it is the worlds fastest-growing economy. The purpose of this paper is to look at the feasibility of increasing the sales of Apple iPhones in China after analyzing the country’s business environment. It is imperative to mention here that Apple already has 6 stores in the greater China region which includes Hong Kong. Additionally Apple relies on a network of resellers in order to distribute its products throughout China. What makes China attractive? The tally of wireless subscribers in the most populous nation of the world is 710 million vis-à-vis 217 million in the United States. The smart-phone market is growing rapidly as the three main Chinese telecom operators have adopted the third-generation, or ‘3G’ technology (Chao 2009). With merely 11 million smart phones having been sold in the country in 2008, the potential market for smart phones is humungous, to say the least. Apple has ventured into Chinese soil by partnering with China Unicom. It has not yet inked a deal with China Mobile, the worlds largest wireless carrier, to sell its iPhone. If a deal with China Mobile consummates, the opportunity for Apple would increase manifold as China Mobile boasts of more than 600 million subscribers, more than all U.S. carriers combined . As things stand in China, the supply of iPhones falls behind demand. Now this in itself is a good reason to up the ante on expansion in China. At the same time, it is critical to understand that the excess demand fosters a gray market for such devices in China (USA Today 2011). To compound problems for the company, these devices sell for as much as 30 percent below the original branded product. However, the gray market iPhones have an inherent problem. The users of such imported devices have to manually input Chinese characters into their phones, thus putting the buyers to great inconvenience (Lau 2009). Furthermore, gray-market phones have Wi-Fi connectivity and thus they do not conform to Chinese government regulations on wireless Internet technology (Chao 2009). This therefore implies that the prevalent gray market does not have the potency to kill the main brand Apple. In fact, the users of grey market are themselves looking at a better product offering, an offering that can be provided by Apple Inc. How is Apple Inc. faring in China? The Asia-Pacific region accounts for about 20 percent of Apple’s total revenue. Apple’s international sales, especially in the greater China region are registering robust growth. The company clocked $3.8 billion in revenue, a six-fold increase from the year-ago period, in this region in the quarter ended June (Buzzom 2011). While the financial numbers are good, the room for improvement is great. Research conducted by technology consulting firm Gartner reveals that Apple has a mere 13 percent share in the smart phone market. The market share of Apple stands at a miniscule 2 percent of the overall mobile phone market which is dominated by Nokia and Samsung (Chow 2011). The company has 6 stores in China.1 However that is not sufficient. Apple still has a long way to go so far as the retail expansion in China is concerned. Companies like Lenovo, Hewlett Packard and Acer have a much wider distribution network vis-à-vis Apple’s network in the country. Setting up of new stores will give a lot of mileage to the company. They will help Apple increase brand awareness and consumer mind share. This, in turn will drive demand for the company’s products. Even the resellers acknowledge that Apple stores will boost their business as well because the brick-and-mortar store will be a powerful marketing tool for the brand. Operating only 6 stores in a country like China is zilch considering that some brands have tens of thousands of stores (Chow 2011). A top company official admitted that Apple is merely “scratching the surface” when it comes to reaching its potential in the Chinese market (Chow 2011). The Hong Kong store deserves special note here on account of two reasons; one Hong Kong is considered as a tech savvy region and therefore attracts hordes of shoppers to buy consumer goods and electronic items and two, goods sold in Hong Kong do not attract sales tax. Nor does Hong Kong levy import duties on goods. This gives a cost advantage to the end consumer. Thus presence in Hong Kong is a crucial to Apple’s success in China. China as a Market In terms of geographical and cultural diversity and industrial complexity, no other country comes remotely close to China. It is therefore imperative to understand the social, cultural, political, economic, religious, financial/monetary, legal and educational environment of this country. The understanding of this macro environment will help Apple Inc. understand the intricacies and competitive intensity of expanding business in China Area and Population With 9.6 million square km of land area, China is only somewhat bigger than the United States. However, with a population of 1.35 billion, the highest in the world, it is a haven for any marketer. The one-child family planning policy was introduced in the country in 1980. The life expectancy is 72 years for men and 76 years for women (BBC 2011). Ethnic, Religious, and Linguistic Groups Variety is one of the most defining characteristics of China as the country is home to a great number of ethnic and linguistic groups. More than 91 percent of the population consists of the Han race. Additionally there are 55 ethnic minorities in the country. As a country China is atheist; however there are quiet a few religions that are traditionally practiced. Major religious groups include Buddhism, Christianity, Islam and Taoism (BBC 2011). The standard language in the country is Mandarin but there exist various regional dialects which mutually are incomprehensible. 50 minority languages are also spoken in the country. Of these, only 20 of them have written versions. Communication issues are the biggest stumbling blocks for US companies intending to do business in China. More often than not, people visiting China to strike business deals hire translators to overcome the language barrier. (Hannon 2006) Economic Environment The survival and growth of a company, especially for a one like Apple whose products carry a heftier price tag than those of competitors, is contingent on the economic environment of the country. In other words, affordability plays a key role in the success of the business. China has a gross national income per capita averaged $4,260 in 2010 (World Bank 2011). Rural households, which account for 70 percent of the population, have lesser income. This makes it difficult for many mainland consumers to afford an iPhone. For the people in this lower rung of income, fake Apple products that are essentially the same as iPhone in shape as well as features suffice. China is only second to India when it comes to the number of poor in the world. In a country where poverty reduction remains a fundamental challenge, penetrating the market would not be a possibility any time soon for Apple. However, China has a much larger consumer base and is therefore more attractive than other countries which have higher per-capita incomes but with a smaller consumer base. The private consumption in the country stood at $890 billion in 2007. China trails behind the United States, Japan, the United Kingdom, and Germany to feature as the worlds fifth-largest consumer market. The consumption-to-GDP ratio in the country at 36 percent is far below than the consumption ratios of United States which is more than 70 percent (Mc Kinsey 2009). Chinas low consumption rate can be attributed to behavioral and structural factors. The saving rate in the country is phenomenally high. The average saving rate in the country is 25 percent which is about 6 times more than the savings rate for U.S. households. The saving rates will decline moderately over the next two decades and would boost private consumption (Mc Kinsey 2009). To top it all, there is growing evidence of the emergence of a middle class with huge purchasing power and distinctive consumption patterns. The ‘new rich’ and ‘yuppie’ groups are the growing and will buoy the sale of foreign products like the iPhone. There is still a yawning gap in the economic conditions of people living in urban China and the rural hinterlands. Due to the construction boom, the urban areas have witnessed an influx of rural residents. This immigration is especially evident in the eastern region of the country. It is estimated that even if the absolute difference between the richest and the poorest continues to widen, incomes will rise for all segments of the society (Mc Kinsey 2009). Legal Environment The road traveled by Apple so far is the country has not been free from bumps. The company had planned to launch as many as 25 stores in the country last year. However, Apple missed the target because it misjudged the time that was required to launch a store in a country that is besieged by bureaucracy and corruption. Experts opine that the sluggish pace at which Apple is opening its trademark full-service Apple Stores in China is providing the impetus to unscrupulous elements to open up copycat stores in the region (Chow 2011). Earlier this year, authorities in Chinas southwestern city of Kunming had uncovered 22 fake Apple stores. These stores were shut down after Apple complained of unfair competition and violation of its registered trademark. Foreign companies operating in China often allege that enforcement of rules and regulations in China is sloppy and the country is off target when it comes to brining to book the violators of intellectual property. In fact, the U.S. Trade Representatives office has stated that the record keeping for preventing copyright theft is amongst the worst in China. (Reuters 2011). A survey conducted by the American Chamber of Commerce revealed that countries of foreign origin having business operations in China often confront ‘rising protectionism’ i.e. preferential treatment is meted out to the domestic players at the expense of foreign competitors. Thus China does not offer a level playing field for business. Inconsistent interpretation of regulations and general lack of transparency make it difficult for foreign organizations to do business in this country. Political environment China is often seen as a ruthless country where citizens are oppressed at the hands of people at the helm. A look at history reveals that a fearful implementation of a Communist vision of society was enforced under the leadership of Mao Tse-Tung. The country has witnessed millions of deaths wherein attempts have been made by political leaders to weed out any uprising against the Communist rule. The Great Leap Forward and the Cultural Revolution are a case in point. It was in 1976, the year of Mao’s death, that China took the path of reforms. The new government allowed private enterprise in the Early 1980’s. While reforms have changed the economic structure of the country drastically, a lot is desired on the reforms of the political structure. The ruling Communist Party still retains monopoly on power and maintains stringent control over the citizens of the country. Over the years the country has unquestionably become more receptive to peoples concerns. Still, any opposition from any quarter is severely dealt with. Outspoken dissidents customarily land in labor camps (BBC 2011). On the positive site, there is a clear consensus among the political parties that China needs to tread its chosen path of incremental reforms instead of fundamental changes. While all parties subscribe to the fact that the reform process should not be rolled back, the speed with which these reforms have to be introduced and implemented is subject to debate. Social environment The country abides by strict social stratification and emphasizes the individual as a group dimension. As a society, China is extremely class-conscious. In general, there is little social mobility. There is a clear cut demarcation between the who’s who and the hoi-polloi. Human rights are, at best, secondary, if not non-existent. Businesses lay emphasis on allegiance, give-and-take relationships and sincerity in dealings with others. The social discontent manifests itself in protests by the general public. The society is plagued by the menace of corruption, land seizures and evictions. Other pressing problems include the growing rate of HIV infection. Cultural Environment It is common knowledge that to get things done in China, one has to have links and needs to know people who matter. In other words, networking plays a vital role in the success of any business in China. The Chinese name this gamut of relationship building as ‘Guanxi.’ It is said that if you know the person who ‘counts’ then that person will help you tide over all your business problems (Wilson 2010). One of the most important things to take note of the cultural aspects of the country is that that the Chinese do not like to say ‘no’. This aspect is critical to understand for it may lead to communication gaps in business dealings. Financial/Monetary Environment Traditionally Chinas financial system has been highly regulated. When the economy was opened up in the late 1970’s the country initiated a series of noteworthy reforms in its banking system as well. As things stand today, banks play a much more vital role in the development of the country than any time in the past. On one hand these banks provide funds to enterprises to set up or expand businesses and on the other hand accept deposits from the public to negate the effect of excess liquidity in the system. Educational Environment Education is a means through which an individual acquires knowledge and skills to earn a livelihood. The Chinese government made education a matter of primary importance and took various initiatives in this regard. The country has adopted a nine-year compulsory schooling system and has achieved a literacy rate of more than 90 percent. Conclusion The aforesaid discussion establishes that China is the fastest growing economy of the world and offers mouth watering business opportunities. As is the case with any territory or region, China, as a market, has its share of obstacles. Apple’s stint and expansion in China would also follow this norm. It can however be said that the advantages of operating in China far outweigh the challenges that Apple will face. The economic environment in China looks promising for the company as the middle class is likely to burgeon in the coming years. The country is also expected to register a moderate decline in the savings rate. Thus the private consumption will increase and buoy sales of products like the iPhone. Since Apple has already stepped on Chinese soil and is doing good business thus far, there is no reason to feel that the company cannot continue to grow by leaps and bounds in the region. In fact, the company’s current performance in the country provides the much needed assurance to go on an expansion spree. Apple is conversant with the Chinese social structure and cultural environment by virtue of its presence in the country. The top five markets in China include Shanghai, Beijing, Guangdong, Jiangsu, and Zhejiang provinces. Apple stores are up and running in Shanghai, Beijing in addition to Hong Kong. The company would do well to target the other important provinces first.While the new store launch plans are ambitious, Apple needs to remember is that expansions in this part of the world happen at a much slower pace than they happen at home. Although a gray market for iPhones is prevalent in the country, it has its own shortcoming. The only logical outcome of Apple Inc expanding is China is that it will eat into the market share of the gray-market. Tying up with China Mobile represents a huge opportunity for the company for any such deal would increase Apple’s access to the target group manifold. On the flip side the company needs to be wary of the lackadaisical approach of the government to crack down on the violators of Intellectual Property Rights. It has to contend with continually changing laws an indistinguishable tax structure and corruption which is deep rooted in the society. All said, China is likely to lay a continued emphasis on moving towards a market economy and making government more accountable and transparent. That bodes well for Apple Inc. Works cited “Apple faces criticism for the idea of setting up shop in Chinese University.” Buzzom.com. Web. 09 Oct, 2011. Apple. Web. 12 Oct, 2011. Retrieved from http://www.apple.com/ BBC News. Web. 10 Oct, 2011. 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