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Can Apple crack China with the iPhone 4?

China's electronics consumers pack the Apple store in Beijing.
China's electronics consumers pack the Apple store in Beijing.
STORY HIGHLIGHTS
  • Apple's iPhone 4 will be officially sold in China from Saturday
  • Follows release last week of iPad in the country
  • Some analysts believe this is a sign Apple is taking China's huge mobile market more seriously
  • Apple is currently only fifth largest smartphone vendor in China

Beijing, China (CNN) -- The iPhone 4 is coming to China.

Apple will release its latest smartphone in the world's largest mobile market Saturday, just a week after officially launching its iPad tablet computer here.

The company is also opening two new stores in Beijing and Shanghai this weekend, which will double its retail presence in the country. Apple already has one store in each city and said it plans on opening 25 more stores in China by the end of next year.

Similar to the high profile launch of the iPhone 3 in China last October, analysts say they expect much fanfare around the release of the iPhone 4, which will be available in Apple stores as well as at China Unicom outlets for customers with a two year contract, the company said in a press release.

The 16-gigabyte version of the phone will cost 4,999 yuan ($745) while the 32-gigabyte will sell for 5,999 yuan ($895), the company said.

When the iPad was launched in China last Friday, hundreds lined up outside Apple's flagship store in Beijing for hours (one Apple fan reportedly waited for more than two days) to be among the first to buy the coveted device -- a scene that likely will repeat itself when the Apple stores open their doors on Saturday morning.

The iPhone 4 is going to be sold out, a success, that is my guess.
--Frank Yu, founder of Kwestr
Video: iPad on sale in China

"It is going to be successful. People are going to line up," said Frank Yu, founder of Kwestr, a Shanghai-based web services company. "It is going to be sold out, that is my guess."

Sales of the iPhone 3 were initially lackluster with China Unicom only selling around 5,000 units in the weeks following the device's launch in 2009.

However sales volume picked up dramatically earlier this year after the mobile operator lowered rates for its bundled iPhone packages as well as adjusted tariffs for 3G access, which remains expensive in the country, according to Analysys International, a Beijing research firm.

By the second quarter, Apple became the fifth-largest smartphone vendor in China with just over a 7 percent share of shipments, according to Analysys. Nokia had the largest share with 26.7 percent.

Analysts say what is notable about the recent iPad launch and upcoming iPhone 4 release is a shift in how quickly Apple is introducing its products to the Chinese market.

Of China's more than 420 million web users, around 233 million use mobile phones and other devices to access the Internet, according to government statistics. That number is likely to more than double by 2014, a report from the market research firm eMarketer said.

Cheaper smartphones combined with more affordable data plans from operators are expected to fuel the growth.

Today, the country has more than 800 million mobile subscribers, making it the largest handset market in the world.

Apple waited over two years to launch the iPhone 3G and iPhone 3GS in China, which were unveiled in the United States and other Western markets in 2007. In contrast, the iPhone 4 went on sale in the U.S., France, Britain, Germany and Japan in June and July. The iPad was released in the U.S. in May.

Slow to act in a booming market?

The delays in launching the original iPhones resulted in a flourishing "gray market" of fake iPhones or iPhones that had been smuggled in from Hong Kong or elsewhere. Many said served to at least partially undercut sales when the handset was legally released in 2009.

"Apple had already lost all of the early adopters in China who wanted to have that fancy phone," Yu said. "We had all already bought an iPhone."

Apple has a revenue sharing model in place, which is a stumbling block in the Chinese market.
--Jake Saunders, technology researcher
RELATED TOPICS
  • Apple iPhone 4
  • Asia
  • Cellular Phones
  • China

It also spurred speculation that Apple was having trouble in its negotiations with Chinese mobile operators to come up with an exclusive deal to bundle subsidized handsets with service contracts.

"[Apple] wasn't able to come to an agreement some of the operators wanted to come up with," said Jake Saunders, head of ABI Research's Asia-Pacific division.

"Apple also has a revenue sharing model in place, which is a stumbling block in the Chinese market where ARPU (average revenue per user) is one of the lowest in the world."

Others saw the delays as a sign that the California-based company simply was not interested in reaching Chinese consumers.

In July, Liu Chuanzhi, head of Lenovo, China's leading PC maker, told the Financial Times that Apple did not care about China and that if the company "were to spend the same effort on the Chinese consumer as we do, we would be in trouble."

Yet some say the quick releases of the iPad and iPhone 4 along with the new store openings is a sign that Apple is not only taking China more seriously but also gaining a greater understanding of its massive mobile market.

The company, for example, released the iPad in its stores without any exclusive deal with operators to link 3G to the device, which also has wireless capabilities.

This means Chinese consumers, most of whom buy pay-as-you-go plans separate from their handsets, are not tied down to lengthy contracts.

"They must have started to realize that the Chinese market is so huge, and it is not the same as other markets," said an industry insider who declined to be identified due to his company's ongoing operations in China.

"With the quick launch of the iPad without any negotiation with operators, I think now they don't care about the 3G connection. They believe it is not that important, at least not in China."

Facing up to big challenges

Even so, Apple could face further challenges here. While the company's products are especially popular among China's expanding middle- and upper-classes who have disposable income to spend on high-end products to show off their wealth, the iPhone is still too expensive for most to purchase.

Additionally, the Chinese version of Apple's App Store still has an interface in English and requires payment from dual-currency credit cards, which many Chinese don't have.

There's also no shortage of pirated iPhone applications available online for free, undercutting Apple's abilities to generate revenues from its iTunes store. An impending explosion of low-cost smartphones running Google's Android operating system could also curtail Apple's growth.

Local application developers say they are now turning their focus to creating Chinese applications for Android devices, only building iPhone apps for more profitable international markets.

"China is going to be an Android market. There will be millions and millions of Android devices here, and right now a lot of companies, even iPhone development companies, are starting to work on Android application development," said Wang Bo, founder of Bokan Technologies, a Beijing-based application development company.

Still it does not appear the demand for Apple products among status-obsessed Chinese will go away anytime soon.

"A lot of people want to buy Apple," said Linda Hou, a 31-year-old who was shopping for an iPad for her child at the Apple store in Beijing on Wednesday.

"It is a famous brand. Some people want to buy it because it is fashionable and some because of its function."

[TECH: NEWSPULSE]

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