Shaun Rein's  Instablog

No. In fact, consumers have paid even more for cracked versions smuggled into the country over the last two years. There are more than 2 million cracked iPhones, and more than that many people have bought them. Younger Chinese typically change their phones every nine to 12 months, and many have profitably sold their iPhones on the secondhand market after using them for a few months. My firm, the China Market Research Group, estimates that as many as 3.5 million Chinese have at one point owned an iPhone. So if price isn't why sales haven't lived up to expectations, what is? Is the iPhone doomed to fail in China, or can Apple turn the situation around?

The iPhone does have a good future in China, but Apple is going to have to change its strategy, and fast. Here are three lessons we can learn from Apple's experience.

1. Take into account local consumer preferences.

The iPhone has sold badly because Apple surprisingly failed to consider consumer preferences and market conditions. The phone is being sold packaged with monthly subscription plans, just as in the U.S., but the vast majority of Chinese prefer to buy pay-as-you-go charge cards. Top-up cards can be bought and recharged cheaply at street vendors everywhere in less than 30 seconds, with no identification required. Subscribing by the month is a pain. You have to go through a mountain of paperwork. Often you need to get sponsored by your company or, if you're from another area, by a friend officially born and registered in the city you're in. This can take hours, if not days. It isn't worth the hassle.

Moreover, our research suggests that although consumers are willing to pay for a handset for prestige, most are extremely price-sensitive when it comes to talk and data plans. The typical consumer spends less than $12 a month, choosing texting over voice calls to save money. Many buy different SIM cards for different cities, to reduce their roaming fees when they travel. Even wealthier consumers do this, because they've gotten used to switching SIM cards when traveling to Hong Kong, where different carriers control the market.

Also, the iPhone's core target market, early adopters, always want to have the latest phone. They don't want a contract tying them to one device for several years. They want to try new ones. For them it makes more sense to use pay-as-you-go cards and switch phones every few months. Some we interviewed used the iPhone, sold it for a profit, and then bought it back again when they realized it was a far superior phone and prices came down.

2. Choose the right partner.

In other parts of the world, Apple has dominance over telecom operators. Carriers see their stock price soar when they sign deals with Apple. In the U.S., consumers have rushed to use AT&T simply because they wanted the iPhone. Apple knows it's at the top of the food chain and can afford to negotiate aggressively with carriers.

China Mobile is the nation's dominant player, with a nearly 70% share of China's 702 million mobile phone users. China Unicom, Apple's carrier, holds the remaining share. It tends to have a less wealthy consumer base.

Our research suggests that most consumers believe China Mobile has better signal stability than China Unicom, especially in regional cities beyond Shanghai and Beijing, where more and more business trips and vacations are taking place. People told us they didn't want to change carriers, because they didn't want to worry about weak signals when traveling, even if that meant staying with China Mobile's slower connection. There is also no phone number portability between China Mobile and China Unicom, and consumers don't want to change their numbers just for a new phone.

Why change your phone number and take the risk of bad signal strength when you can buy a cracked iPhone and keep the same number and operator?

3. Launch globally all at once.

Finally, one of Apple's biggest mistakes was that it didn't launch the iPhone around the world all at once. It took far too long to get to China. In today's world, companies can no longer be strongly Americentric, starting product launches in the U.S. alone and only gradually reaching other markets as supply chains catch up. The new growth markets will be in places like China, India and Brazil, where consumers are still spending. Consumers in those places don't want to wait years to get a product they read about online the moment it comes out.

You can't marginalize developing markets anymore. Often they're now the main markets. China has become the world's largest market for both telephones and automobiles.

Despite its rocky start, the iPhone still has a lot of potential in China. That 3.5 million Chinese have paid what it costs to buy cracked ones shows that the market is huge, and customer satisfaction with the iPhone is unbelievably high. Apple just needs to do a better job of taking consumer preferences into account, and to work with its partner, China Unicom, to better deliver what Chinese want.

Shaun Rein is the founder and managing director of the China Market Research Group , a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

Last year, Oprah Winfrey earned $275 million--more than those three Wall Street rogues Ken Lewis, Dick Fuld and John Thain combined--yet no one is calling for her head. Her TV show and O, her magazine, remain wildly popular. She moves entire industries. Twitter's traffic surged 43% after she tweeted for the first time. A recommendation from her turns obscure authors and products into best-sellers.

On her way to becoming one of the most influential people in the world, Oprah has helped millions of people feel better about themselves and lead more fulfilling lives. Here are three core business reasons she has become one of the world's richest people.

She truly understands and relates to her core target market.

Oprah genuinely sympathizes with her audience's struggles and aspirations. She does not pretend to have led a fairy-tale celebrity's life; rather she has revealed that she was sexually abused when growing up and has been candid about her battles with her weight. She uses real, shared pain to get closer to her audience. As she conquers her demons, her audience feels they can conquer theirs.

They trust her. She is more than a talk show host. Too many people in charge of brands don't get the importance of understanding and relating to consumers. Companies launch advertising campaigns that consumers can't identify with, even as those consumers, looking to stretch their dollars farther than ever before, yearn to turn to companies they feel they can trust and connect to emotionally.

Skin care company Clarins got it all wrong in targeting Chinese men. It used ethnically diverse metrosexual models they couldn't relate to. The company failed to understand that Chinese men don't want to be seen as at all feminine or exotic. Nor do Chinese women want to see their men that way. Sales sputtered, while L'Oreal's Biotherm line prospered with Asian models who came across as the epitome of masculinity.

Another company that successfully relates to consumers in its marketing is Unilever.. Its Dove Campaign for Real Beauty employs as models everyday women with all sorts of body shapes and sizes, not the airbrushed waifs who grace the covers of fashion magazines like Vogue and Elle. People buy Dove's products because they identify with the familiar yet beautiful women who use the products in the ads. The five-year-old campaign has been one of the most successful of all time.

She knows that making the world a better place and earning money is not a zero-sum game.

Whether inviting experts like Dr. Mehmet Oz to give health care advice or giving suggestions on how to find happiness, Oprah does what she does to make people's lives better. That is true leadership. She clearly is unwilling to do anything for money alone. She takes a moral and long-term perspective--and that way, she makes even more money.

Far too many are driven by simple greed. Too many senior executives have enriched themselves at the expense of front-line workers and shareholders. Too many unscrupulous executives have engaged in financial chicanery like backdating stock options. Not only are Main Street and Congress up in arms, but large institutional investors like the California Public Employees' Retirement System have begun to use corporate responsibility as a key metric in investing. Last year CalPERS publicly called out five corporate underperformers, including Cheesecake Factory and La-Z-Boy, citing corporate governance failures. It is pushing to implement provisions to claw back the compensation of executives who engage in illicit activities.

Corporate boards need to be on alert that misbehavior will hurt their stock prices. CNBC's Jim Cramer publishes his Wall of Shame for disappointing CEOs, like United's Glenn Tilton, who made $17 million over the last five years, and more than $6 million in 2008 alone, while United's share price dropped around 40% and the pay and pension of its front-line workers was slashed.

Nobody thinks of Oprah as greedy.

She understands how to honestly leverage her brand.

With profits falling almost everywhere, businesses need to find new sources of growth. Oprah understands this well. Her work with Dr. Phil and Rachael Ray has resulted in successful spinoffs that hold true to and extend her core value of helping people.

For corporations, leveraging a brand can mean looking to new markets, as GM and Barbie have done in China (as I wrote in "Barbie Goes to China"), or it can mean branching out into new product lines. For instance, Giorgio Armani has expanded the scope of its business to include household accessories. Bulgari and Versace have moved beyond jewelry and clothing, respectively, into high-end hotels. Such expansions make sense, for they are being done so they dovetail with the brands' core emphasis on luxury, sophistication and exclusivity while opening up new streams of revenue.

Oprah has energized an entire industry by staying true to her ideals. She reminds us that business can be done ethically and profitably at the same time. Too many executives over the last few decades have acted immorally, scammed the system or even engaged in outright thievery, like Jeffrey Skilling at Enron. The most successful enterprises--individual and multinational alike--are the ones that create emotional bonds with their customers, stay true to their core and use their brands and ideals to lead.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.

One of the main reasons China has withstood the financial crisis better than analysts like Gordon Chang, author of The Coming Collapse of China and a Forbes columnist, predicted is because the export sector accounts for far less of the economy than the approximately 40% figure that they believe. For a while after China entered the World Trade Organization, in 2001, exports did take up that much of the economy. The government was green-lighting practically every project proposed to it in a rush for economic development. That fast-growing capacity couldn't be used to make things to sell to Chinese consumers; they were still too poor. So companies just set up factories for export.

That situation changed dramatically even before the financial crisis. My firm, the China Market Research Group, estimates that by 2008, exports accounted for just 20% of the economy. A combination of rising costs and new economic policies caused the decline.

For one thing, the government stopped approving high-polluting, energy-intensive, low-intellectual-capital projects. Pollution was starting to cost the creaky state-run health care system too much, and the government wanted to reduce its reliance on foreign energy, so it pushed for a more service-led and less export-led economy. Scores of factories relocated to Vietnam, Sri Lanka and Mexico, where policies were more welcoming and labor and real estate costs were lower. Many factories shut, and larger manufacturers like Foxconn, the maker of Apple's iPhone, consolidated their market share.

The shift away from tiny, soot-belching factories to larger ones partially explains why energy use has not risen as fast as GDP over the last several months. The economy is less reliant on energy-inefficient factories.

The export sector is going to continue to play a diminishing role as domestic consumption increases, as I wrote in "Tap Into China's Swelling Consumer Base." We estimate that consumer-fueled domestic consumption will account for 50% of GDP within the next five years, up from 33% today.

Myth No. 2: China has a limitless supply of cheap labor.

People may think it does, but in fact recruiting and retaining talent has been difficult for companies even during the financial crisis. Many blue-collar workers are no longer willing to labor for low wages in manufacturing hubs like Guangdong, visiting their families only once a year. They've lost the fear of going hungry, so they've gotten more selective about employment. They have far more job opportunities closer to their homes, as China's $586 billion stimulus package has propped up the economy in the poorer regions that most construction and factory workers come from.

At the white-collar level, most multinationals need to rethink their human resource strategies. Job-hopping is high, with many companies losing 20% of their employees a year. The overwhelming reason younger white-collar workers leave their jobs is not because their salaries are too low but because they see no career paths there.

Nothing demoralizes young workers more than knowing that expatriates get out-sized pay packages at places where there are no mainland Chinese senior executives. They may have Taiwanese, Hong Kong and other Chinese-speaking executives, but those don't count. Mainlanders still see them as foreigners. Many mainlanders feel, why work for Google if you can get a job with its Chinese competitor Baidu and feel there's no glass ceiling above you?

Companies need to make clear to young Chinese that they're dedicated to retaining them. They need training programs, overseas rotations and clear paths for advancement. Also, companies need to have homegrown leaders who are paid as much as foreigners. Rainmakers who are Chinese should be paid better still, because they are scarce and hard to hold onto.

Myth No. 3: Connections are everything.

If a potential business partner or employee leads off a conversation by saying he is well-connected, and that's what he brings to the table, run like Usain Bolt. Too many companies hire the offspring of well-connected elders and think those connections will guarantee success.

Yes, who you know is important in China, as it is anywhere, but the economy is becoming more sophisticated. Regulations are more transparent than they were just five years ago, and in most situations you no longer need inside pull to get permits. Gone are the days when knowing the right people guaranteed riches. For most businesses, the four Ps of marketing--price, placement, product and promotion--are starting to prevail. Would you simply hire the son or daughter of a deputy mayor in a small town in California and assume certain success? I doubt it. So why would you in China?

Connections can actually damage your business if a factional fight breaks out and your well-connected partner is on the wrong side. The winning side might take business away from those closely associated with the losers. I have seen many companies depend on one big connection and then lose everything after an official lost power or was rotated to another province or ministry. You do need to cultivate relationships with government officials, but do not base your whole business on them.

As China emerges from the downturn relatively unscathed, companies need to understand it can no longer be relied on as a base for low-cost manufacturing. Workers and the government are both demanding change. The faster you can rid yourself of outdated myths about the country, the sooner you will be able generate profits there.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, clickhere.