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Chinese buy $100 smartphones, not iPhones

Consumer demand
By Paul Hodges on 29-Jan-2013

iPhone Jan13.pngOne of the great myths of recent years has been that China – whose population mainly earns less than $10/day – has somehow become ‘middle class’.

It is certainly true that some of China’s 1.3bn population have done well since the economy reopened to the world after Mao.

And equally true that the house price bubble created the illusion of wealth in the major cities, even though incomes remain relatively low on a global scale.

But Apple’s problems with its iPhone sales highlight how reality is starting to puncture the myth:

• The iPhone 4 was launched in September 2010 at a price of $750
• In January 2010, analysts Morgan Stanley had forecast a “potential for Apple to sell 4-5 million units annually (in) an attractive addressable market of 50 million consumers”
• In July 2011, Apple said its China stores “have more than 40,000 visitors per day – four times average traffic in the US stores
• But last week it emerged the iPhone is now in only 6th place in China’s smartphone market

The reason is affordability. As Bloomberg comment, “the lack of low-cost products limits the iPhone-maker in emerging markets“. Apple’s market share was apparently down to 15% in Q3 2012 “as it struggled to lure consumers earning an average of $577/month”.

Apple’s problem highlights the dilemma facing a vast number of companies, as they slowly realise their business strategy for China has been misguided. There never were 50m ‘middle class’ consumers in China. Instead, as the blog has noted several times, there were 50 million who earned more than $20/day ($7600/year). This is not quite the same thing.

The real market in China is for low-cost products. Thus Apple is being outsold by local competitors offering smartphones that cost less than $100. And these phones have features required in China – such as separate SIM facilities for business and personal use – but not available with the iPhone. Apple will thus find it difficult to recover from its mistake, even though it is now apparently planning to launch a model costing between $99 – $149 later this year.

As former CEO John Sculley notesApple needs to adapt to where the growth is. It’s got to learn how to sell products that are priced for the price point that the emerging middle class in Asia, for example, can afford.”