ChinaLuxCultureBiz's  Instablog

 

Recently, Apple announced that the company plans to open 25 new stores in mainland China over the next two years, as it focuses on building its minuscule market share in one of the world’s most important tech markets. Although computer sales doubled between Q1 2009 and Q1 2010 and 200,000 iPhones have been sold in China since last October according to a Forbes article, Apple enjoys neither the widespread popularity nor market presence of global competitors like Dell or Toshiba or domestic competitors like Lenovo or Founder in China.

While much of this boils down to the fact that Apple has only one official retail location in China at the moment (in Beijing), there are other important reasons why wide-eyed optimism over Apple’s prospects in China are somewhat premature.

In the past few weeks, many articles have billed Apple’s push into the China market as a potential goldmine for the company, predicting that computers and new products like the iPad will sell like hotcakes — or, perhaps more appropriately, shaobing? — throughout the mainland. While some predictions — such as the fact that the reasonably priced iPad could realistically become “the first Apple computer many Chinese can afford” — are somewhat valid –  there are far more reasons to be cautiously optimistic about Apple’s prospects in China rather than expecting too much in the short- to medium-term.

Technical Difficulties

A common gripe that many Chinese users have with Apple computers is incompatibility issues with a number of Chinese websites, such as the wildly popular e-commerce platform Taobao (though problems with Taobao’s online payment system Alipay were addressed last year), and popular Windows-centric software like the chat program QQ Whirlwind and video program PPS. For most day-to-day Internet users in China — who tend to favor online gaming and chatting over all else — this is a deal-breaker.

Price

This has been mentioned elsewhere, but it remains a fact that Apple’s price-point remains out of the reach of most of the college-age or younger white-collar professionals in China who are the company’s bread and butter in major markets. This means that Apple computers have been — and continues to remain — very much niche products, popular mainly among a relatively small proportion of individuals working mostly in the creative industries.

For a college student or twenty-something in China, the choice between an RMB 8,000 MacBook and a basic Lenovo laptop for about half that price (or a Shanzhai PC for even less) is generally a foregone conclusion, especially when the aforementioned software issues are taken into consideration. As long as price comes first when Chinese buyers look for a computer, it doesn’t matter how many retail locations Apple opens in China.

Chinese consumers remain, on the whole, extremely pragmatic shoppers. Unless Apple targets only wealthier consumers who value flash appeal over functionality — which they very well might do — computer sales will likely remain sluggish for years to come.

“Made in China”

Another issue that shouldn’t be ignored is the company’s “Made in China” tag. Apple remains — in China, certainly — a luxury brand, and as many luxury brands have found out already, many in China (even if they have the money) still equate “Made in China” with “Do Not Buy.” While some articles downplay this issue, noting that Apple is more than a luxury brand (since luxury brands can be easily counterfeited), it’s a “premium brand” — a valid point — we, and many others, feel that the “Made in China” distinction is a disadvantage for the company, again, at least in the short- to medium-term.

iPad

It’s still a bit early to speculate on the potential success of the iPad in China, but it’s safe to assume that it’s popularity will remain heavily dependent at its final price in the China market. Details about the iPad’s China price are still relatively scarce, with netizens there expecting it to cost no less than RMB5000, or US$732, still far too expensive for most urban Chinese. Though the iPad will undoubtedly find an audience in China, rate of adoption will likely remain anemic, at least for a while, unless there is some kind of subsidy program with China Unicom or China Mobile. All speculation, but everyone’s speculating at this point.

They’ve Got Some Serious Convincing To Do

Although cheaper offerings like iPods and possibly even the upcoming iPad may prove reliable sources of revenue, Apple undoubtedly wants more Chinese to trade up and shell out for their high-end desktops and laptops. As a result, the company will have to work extremely diligently to convince Chinese consumers that: 1.) It’s worth the money, 2.) It will work on your favorite sites and games, and 3.) the quality is superior to domestic brands and/or Windows PCs. No small task.

Women’s Wear Daily reported last week that French luxury house Hermes plans to support the launch of a new luxury handbag brand, Shang Xia, in China this coming spring. According to reports confirmed by French newspaper La Tribune, Hermes’ involvement in the launch of Shang Xia wil mark the first time Hermes has built a brand from the ground up, and the company’s products will be designed, manufactured and sold entirely in China.

All of this seems to make sense, since China is now the world’s second-largest luxury market and the world’s most populous country. But is this concept doomed to fail?

While this new brand is obviously a way for Hermes to experiment with “affordable luxury” in the China market, it is likely that many China luxury watchers will be less than enthused about Shang Xia. As a recent survey by the Pao Principle, a global business strategy consulting firm, found, Chinese luxury consumers don’t want to feel that China is the ”dumping ground” for cheaper or excess inventory.

If they’re going to invest in luxury goods, they want them to be expensive because they’re obsessed with exclusivity. As the study found, mainland Chinese luxury buyers value two things over all else: quality and selection.  Aside from the lowest end of luxury buyer, the target consumer wants to buy items that are shown in New York, Tokyo and Paris brand boutiques — but not in Hong Kong — rather than a mainland-only sub-brand that feels cheap in comparison to the “real thing.”

While it’s far too early to conclude, sight unseen, that Shang Xia will be of subpar design or quality — it very well might be of exceptional quality and appeal to a wide swathe of Chinese luxury buyers — it brings up critical strategic questions for foreign luxury brands: Is it better to pursue only a high-price, high-quality, exclusive tactic in the China market and limit your buyers to an exclusive core? Or is it better to focus on your high-range line only in Hong Kong, where most wealthy mainland Chinese do the bulk of their luxury shopping, while considering a supplementary sub-brand strategy in the mainland? Does involvement in mainland-only sub-brands dilute top tier brands?