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.