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Apple Invades China! World's Biggest Market Potential

|Includes: Apple Inc. (AAPL), CHU, LNVGY, LVMUY

Why should investors care about Apple's (NASDAQ:AAPL) invasion of China? After all, the company's first store opened in Beijing two years ago. Sales of the iPhone by China Unicom (NYSE:CHU) have been disappointing.

Try taking a hint from the Chinese.

The opening of the new Apple store in Shanghai over the weekend was spectacular. Thousands of Chinese Apple enthusiasts walked, drove, and flew in to attend the event at the foot of the Oriental Pearl Tower on Saturday.

Apple Invades China! World
Credit: Shanghai Daily

The new store is a stunner. Under a forty-foot glass cylinder sprawl 16,000 square feet of sparkling retail space. With 175 employees, the Shanghai flagship store will have the largest "Genius Bar" assisting customers in the world.

The Shanghai opening matters because it signals that Apple is finally getting serious about the Chinese market. China is the second largest PC market in the world but so far Apple has barely made a dent.

The CEO of Lenovo (OTCPK:LNVGY) joked with Shanghai Daily, saying, "We are lucky that Steve Jobs has such a bad temper and doesn't care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble."

Apple is the world's largest technology company by market cap but that doesn't mean it will ruin Lenovo's business. That's not the strategy.


The throngs attending the Shanghai store opening demonstrate something that Apple learned with its stores. New stores create buzz.

Selling Apple's high-end products depends on clever marketing. This will be especially important in China where average salaries are lower than in most of the company's established markets.

That's why Apple intends to open 25 stores throughout the country by the end of 2011. That's a major push even by Chinese standards.

Apple won't say where the stores will be established but there are already rumors flying around Shanghai that a second store will open there in a popular high-end mall.

Doubters point out that Lenovo computers are sold through 10,000 retail outlets. By that standard the Apple invasion may seem tiny.

But Apple is targeting a surprisingly large contingent of upper middle class buyers. With Apple's 23% profit margins, there's a lot of money at stake.

Apple Invades China! World
Credit: Shanghai Daily

Buzz is also critical to iPhone sales. China Unicom has sold only a million iPhones. But another two million have been bought on the grey market from tourists and smugglers.

Demand is definitely growing. During the last quarter only 100,000 iPhones were sold at a price of 7,000 yuan, more than $1,000. Now sales have zoomed to an average of 10,000 a day.

Apple isn't trying to compete for Lenovo's 0.3 percent profit margin in the PC business. Apple wants to be the Louis Vuitton of computers in China. In fact the Oriental Morning Post reports that Apple will aim to match Louis Vuitton's (OTCPK:LVMUY) China presence.


Apple in China aims to be much more than a boutique. Morgan Stanley's Apple analyst, known for being bearish has become a bull on China.

Last January Katy Huberty told Fortune magazine that there are about 50 million potential Apple customers in China. Sales of iPhones could hit five million a year!

Apple's growth momentum in China has raced past the U.S.

Apple Invades China! World
Courtesy: Fortune/CNN

What about the high cost of smartphones? Lower income countries love them.

Apple Invades China! World
Courtesy: Fortune/CNN

Morgan Stanley says there is strong interest and awareness of the Apple brand in China.

Long before the Apple store opened in Shanghai, Morgan Stanley's bearish analyst predicted a rosy future. Her estimate: shares will trade at $325 to $425 by the New Year.


Jim Trippon

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