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Z_CNHI News Service

September 19, 2013

Apple ends China's three-month iPhone delay

BEIJING — Apple used to make its China fans wait three months to get the latest iPhone. Now the company can't afford to leave them behind.

For the first time, Apple will release its newest handsets in China on the same day as the U.S., Europe and Japan. The iPhone 5s and lower-cost 5c go on sale tomorrow in Apple's 11 stores in China and Hong Kong as the company tries to boost sagging market share in the world's most populous nation.

Apple Chief Executive Officer Tim Cook, looking to reignite growth after a year of not releasing any new products, is counting on iPhone customers in China to give it a fresh boost. That goal will be challenged by a diminishing technology edge versus Samsung Electronics Co., a slew of more affordable devices from local phonemakers and the lack of a distribution agreement with China Mobile Ltd., the biggest carrier.

"The iPhone is too expensive for me, I could never afford it," said Li Guang, 25, a department-store clerk in Beijing. "If I were buying a smartphone for myself, I'd never spend more than 3,000 yuan."

The lowest-priced iPhone 5c, with a plastic shell coming in five colors, will sell for 4,488 yuan ($733), almost equivalent to two months' pay for a typical urban worker, based on figures from the National Bureau of Statistics.

Li, who uses a secondhand iPhone 4S passed down by a friend, has no plans to upgrade to the 5c or 5s, she said while taking a smoking break from luggage shopping at Beijing's 77th Street Plaza.

That sentiment concerns investors in the Cupertino, Calif.-based company, which saw its market share in China cut by almost half in the second quarter, dropping it to seventh place. Apple's stock fell 8 percent in the first five trading days after the prices of the new iPhones were disclosed.

"We never had an objective to sell a low-cost phone," Cook said in an interview in Bloomberg Businessweek's Sept. 23 issue. "Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost."

The weaker interest from consumers like Li is a sharp turn from January 2012, when angry buyers threw eggs at Apple's store in Beijing's Sanlitun district after it failed to open on time for the first day of iPhone 4S sales. That handset was released in China three months behind the start of U.S. sales in October 2011.

The iPhone 5 came to China in December 2012, three months after its September 2012 release in the U.S.

Cook visited China at least twice this year and said the country will overtake the U.S. as its largest market. While sales in the country fell 14 percent to $4.6 billion last quarter, China is now Apple's third-largest region by sales, after the Americas and Europe.

A few years ago, sales in the country totaled only "hundreds of millions" of dollars a year, Cook said in July.

Kitty Potter, a Beijing-based spokeswoman for Apple, declined to comment on demand for the new iPhone models.

A challenge for Apple is that 80 percent of smartphone shipments in China in the second quarter were priced below $400, said Jessica Kwee, a Singapore-based analyst with researcher Canalys. Apple trails Samsung and domestic vendors Lenovo Group, China Wireless Technologies Ltd.'s Coolpad, ZTE Corp., Huawei Technologies Co. and Xiaomi Corp.

Xiaomi's newest handset costs 1,999 yuan, and Lenovo's flagship K900 IdeaPhone sells for 3,299 yuan.

"The new devices are not likely to widen the iPhone's mass appeal" in China, Kwee said. "The unsubsidized price of the new devices is too high for mass adoption."

Apple still has a big opportunity by appealing to more wealthy customers in China, said Carl Howe, an analyst at Yankee Group in Boston. Many Chinese consumers view the iPhone like owning a luxury car and will pay the premium, he said.

"A lot of us in the West underestimate just how big the affluent Chinese market is," Howe said. "Even though China has a lower percentage of wealthy individuals than here in the West, the absolute number of affluent Chinese who can afford an iPhone is still higher than a country like the United States."

Subsidies from Apple's two carrier partners in China, China Unicom (Hong Kong) Ltd. and China Telecom Corp., can help make the devices more affordable, and on some plans even provide free handsets.

Even so, Apple isn't getting the same support from Chinese carriers that it enjoys in the U.S., where companies like AT&T Inc. and Verizon Wireless offer the iPhone 5c for as little as $99 to entice customers to sign up for a two-year contract. That backing has helped make the iPhone the top-selling smartphone in the U.S., according to ComScore Inc.

In China, wireless carriers are looking to rein in costs from adding new users. China Telecom, the third-largest wireless company in China, requires customers to make a down payment for the cost of the handset: 4,488 yuan for any plan with a 16- gigabyte iPhone 5c, and 5,288 yuan for the iPhone 5s, according to the company's website. Portions of that payment are given back in monthly installments depending on the contract, meaning a customer still needs to come up with the cost of an iPhone.

With a monthly plan costing 289 yuan for two years, the China Telecom subsidy works out to 2,890 yuan, or 15 percent less than the previous model on the same plan, according to Eva Yip, a Hong Kong-based analyst at Sun Hung Kai Financial Ltd.

By releasing the iPhone on the same day in China as other countries, Apple may also shrink demand for the so-called gray market, when people would take advantage of the sales lag by purchasing iPhones or iPads in the U.S. and then selling them in China. In previous Apple releases, lines in the U.S. were crowded with shoppers who said they had been hired to purchase devices that would then be resold in China.

Apple's best chance to boost sales may come from the world's largest carrier by subscribers. Apple is near a deal with China Mobile to distribute the iPhone, a person familiar with the talks has said. That would open up more than 745 million new potential customers for Apple.

Until then, Apple will have to hope for a change of heart among diehard fans like Chen Lang, who said he can't afford to upgrade to a 5c or 5s right now. Chen, a 24-year-old who just started working at a car dealership, said he plans to keep using the iPhone 4 he bought two years ago.

"I'm at a point where I need to be saving money," Chen said outside Apple's Joy City Mall store in Beijing's Xidan shopping district. "When it does come time to replace it, I'll stick with Apple."

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