I was wrong.
Apple Reality Distortion Field + China Hype = ?
In the lead article in his most recent newsletter Inside China Dispatch: Your Free Guide to Profiting from the China Miracle Taiwan-born/California raised hedge fund huckster Robert Hsu proves once again that a) China hype is alive and well, and b) having Chinese ancestry does not give you automatic insight into into doing business in the PRC.
The title of Mr. Hsu's article is "Apple's iPhone - the New Killer App in China." He calls iPhone "the ULTIMATE China-friendly gizmo" (emphasis his.) He says this because the phone is central to the China technology experience, not the computer.
This, ladies and gentlemen, is the perfect example of how an otherwise intelligent person can make a huge, expensive mistake in China.
Let's take apart his logic:
Argument: Chinese love their cell phones
Argument: Chinese use their cell phones more than their computers
Argument: The iPhone is a cell phone that does computer-like things
Conclusion: The iPhone is going to be so big in China that Apple's share price should double.
All of his arguments are correct. But his conclusion is dead wrong, for the simple reason that Mr. Hsu has either intentionally overlooked some important facts about the Chinese mobile phone market (which would make him despicable, so I will not accuse him of this), or he simply does not have the knowledge to make this call (pardon the pun.)
iPhone stays Home
Consider the following about the Apple and iPhone situation in China, and tell me whether you think iPhone is the "kiler app" for China, or whether Mr. Hsu is blowing bubbles.
Let's start with the basics:
1. Asia is not iPhone's priority market, and China is not even on the radar: Jobs himself noted that "Asia" won't even see a launch of the iPhone until sometime in 2008. I think it's a little early to assume that China will even see iPhone in that time frame, given that Japan and possibly Hong Kong, Singapore, and Australia look like better candidates for launches than China.
2. No iTunes in China: iPhone relies heavily on the iTunes music store and software ecosystem to deliver a major portion of its value to the user. Apple has not launched iTunes in China, has announced no plans to do so, and faces an extremely hesitant music industry given the looseness of IPR enforcement here (which of course is stupid on the industry's part, but that's a topic for another post.)
3. No Apple Store in China: Unless Apple starts opening Apple Stores in China, don't count on iPhone being much more than an extreme niche product. When you look around the retail environment in China, it is rife with the kind if problems that drove Steve Jobs to open Apple Stores: retail salespeople are hard-pressed to learn enough about their product to make a good effort to sell them. The iPhone is going to need some selling, especially given that it would sell at a very high price, and as mobile manufacturers are discovering, the only way to sell high-end phones in China is to exercise as much control over the retail experience as possible.
A lot of Motorola's success is coming from branded stores, mini-stores, and counters where MOT actually trains the sales staff. Frankly, a lot of Lenovo's (OTCPK:LNVGY) success in China has come from it's own branded stores for much the same reason. No Apple stores, no success for iPhone in China.
4. No Handwriting Input: The iPhone doesn’t have a stylus or any other way of inputting non-roman text without using a roman keyboard. Don’t think that’s important? Go ask the guys selling PDAs in China if Chinese care for QWERTY input. They would give you the same answer that the sales figures do: Chinese prefer handwriting to QWERTY by a huge margin. In fact, well over half of the smartphones sold in China use handwriting recognition as the primary input, and the bestselling PDA in the market - Motorola's MOTOMING, with a 50% market share - is handwriting input . RIM (RIMM) is running up against this problem with Blackberry, and to their credit they're taking the issue seriously. But Steve Jobs hates the stylus. Gee, Steve. Maybe the whole world isn't EXACTLY like you.
5. Carriers don't like closed systems: Carriers in China don't want to sell phones, but they damned sure want to specify a range of software and branded services on the handset as a part of their way of building a competitive barrier against the operator down the block. This is not insurmountable, but it's going to take some effort for Apple to overcome this prejudice.
6. Try Selling a locked high-end phone in China: Steve Jobs has been emphatic about not selling any unlocked versions of the iPhone. Chinese users expect to be able to buy unlocked phones, popping SIM cards in and out at will depending on what number they're using. This is especially the case for the kinds of people who can afford to buy an iPhone: we want to be able to pull out our China Mobile SIM card when we land in, say, Hong Kong, Singapore, Sydney, Manila, or wherever and insert a local SIM card. A locked phone here means significantly reduced functionality.
7. No Third Party Software or services: Chinese love being able to customize their phones and add or drop different games or other applications from operator-based download services or use value-added service providers. In a market like China where carriers depend on these services for a growing chunk of their income, neither operators nor subscribers are going to be terribly pleased with this restriction.
8. The Case of the Missing Features: Even if you assume the iPhone would sell for the same price in China and in the U.S. (no small assumption given the "China premium" I seem to wind up paying on the Apple gear I buy here), the phone would be unlocked and unsubsidized. If you take off the subsidy Cingular is surely placing on the phone in return for the two year contract, you're looking at $699 - 799 for the 8gb iPhone in China. Now, price is not a problem for Chinese users accustomed to paying up to RMB 6,000 for a handset, but by 2008 they'll expect a few things on board that Apple doesn't seem ready to deliver: the ability to shoot video, to use location-based services (i.e., GPS), broadcast or satellite TV, barcode and business-card readers, and the like.
I could easily go on and get more granular, but you get the point.
Steve Jobs: Irresistible Force or Immovable Object?
Now, none of the above represents an insurmountable obstacle: if Apple were to decide tomorrow that China was important to its future, every single one of the issues above could be overcome by some simple decisions at Apple in Cupertino. Of course, that would take some time, and by signaling it's direction, Apple is ensuring that by the time it gets around to Asia generally and China specifically, it's competitors will be ready and waiting. All of which means that Apple would have a lot more trouble turning China into a pot of gold than Mr. Hsu suggests.
Keep in mind that I say all of this as an unashamed Apple evangelist: I own three iPods and five Macs. I'm writing this on a MacBookPro and will post it on .Mac, the official host of Silicon Hutong and The Peking Review. I've owned Macs continuously for two decades, and my company's entire IT budget this year - save an HP printer - will go straight to Apple. But it is precisely as a Mac partisan that I understand most clearly that Apple tends to treat China as a source of supply far more than a market to nurture and support. I keep hoping that this will change, and I am pollyannically optimistic that it will.
In the meantime, however, to paraphrase Doc Searles, the iPhone as it stands represents little more than a great opportunity for Motorola and Nokia (NYSE:NOK) in China.
Back to Our Protagonist
Again, I find it hard to believe that Mr. Hsu would knowingly discount any of the above, so I must believe that he is in fact unaware of the facts. One can certainly understand why. A quick perusal of his newsletter has him making investment recommendations in mobile phones (China Mobile (NYSE:CHL)), commodities (China Aluminum (NYSE:ACH)), precious metals (gold), energy, and education.
That's a hell of a lot of ground to cover, and as most people in the research business in China will tell you, covering one industry here with any accuracy is hard enough these days. I wonder how anyone can cover a half dozen all at once from here in Beijing, much less from a base of operations 6,500 miles away from the action.