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July 12, 2010

Apple just opened its second store in China this weekend and it promises as much excitement and pizazz as all of its other stores recently opened across the world.

The 16,200-square-foot underground space in Shanghai marks the start of a major retail expansion in a country where the company so far has had a relatively modest presence with its first store opened in November 2008 in Beijing.

Apple said it plans to open up to about 25 stores in China by the end of 2011, including a second store in Shanghai.

Apple's flagship stores, which like the Shanghai outlet often sport eye-catching architecture, are a key part of the Cupertino, Calif.-company's branding strategy.

China is the world's largest wireless handset market and second largest personal-computer market after the U.S.

However, while other personal computers makers such as HP have rushed to expand retail channels in China in recent years, Apple has moved very cautiously.

Ever since it opened its Beijing store in 2008, it has relied on a network of authorized resellers for distribution. As a general rule, Apple has been much slower than its rivals in expanding overseas markets, even as it has grown rapidly at home and is now the world's biggest technology company by market value.

Research firm IDC said Apple PCs made up less than one percent of total PCs shipped in China as of the first quarter. In the U.S., Apple owns about 6.2 percent of PC shipments, IDC said.

"Overall, Apple is definitely a late-comer when it comes to focusing on China," said Shaun Rein, managing director of Shanghai-based consulting firm China Market Research Group. He said that "Apple needs to make China a priority market," or risk seeing an impact on its sales growth, not just in the immediate short-term but for the long-term as well.

Apple added that it will release its newly launched iPhone 4 in dozens of countries by September, although it hasn't specifically set a timetable for China.

And according to IDC, the Chinese are very eager to get the iPhone 4 as soon as it will be available in China.

Despite its relatively small presence in that country, Apple enjoys high brand awareness among wealthier consumers there. Its products are seen by many in first-tier cities as status symbols.

At the Shanghai store opening, one Apple fan, holding a homemade poster of Chief Executive Steve Jobs, said he flew to Shanghai from Jilin province, nearly 1,000 miles to the north, to attend the opening, and lined up for no less than five days, two of them standing in the rain.

By Friday night, the crowd at the Shanghai store had grown to about 270 people, some wearing iPhone 4 T-shirts. Several people there said they hoped to be able to buy the iPhone 4 or iPad, which also hasn't started selling yet in China. But neither of those products were in Apple showrooms yet, though the earlier version of the iPhone 3GS was in stock.

Apple said it is definitely accelerating its push overseas. Just 62 of Apple's 283 retail stores at the end of December were international outlets, but the company has said that more than half of the 40 to 50 new stores it plans to open in the current fiscal year, ending in September, will be outside the United States.

Apple's plan to open more stores in China shows "they recognize the importance of these markets outside of the Western world," said Bryan Ma, analyst for IDC in Singapore.

Rein added that Apple plans to start international sales of the iPhone 4 more quickly than with its previous models. The company declined to say when the iPhone 4 and the iPad will be available in China, though Apple's current Chinese partner for the iPhone, state-owned carrier China Unicom has long said it is in talks to sell the new model.

Whether Apple will agree that China Unicom will become the exclusive wireless carrier to offer the iPhone 4 in China is still up in the air, however. In the U.S., AT&T is the only wireless carrier to offer the iPhone, and Apple has recently renewed its contract with AT&T.

Analysts say a delayed release slowed authorized sales of the existing iPhone models in China, as users go to the "gray market" to buy unauthorized imports (sometimes even knockoffs) of Apple products.

Consulting firm BDA China Ltd. estimates that about 2 to 3 million iPhones have been purchased in China via the gray (read: illegal) market. But even that is a relatively small share of the total. China has more than 781 million mobile subscribers as of June 1st, 2010.

IDC estimates that about 762,000 Unicom iPhones were sold in the first two quarters of its official release in China, accounting for about 1.9 percent of China's smartphone market as of the first quarter, and less than one percent of China's overall handset market.

In comparison, Apple sold about 8.4 million iPhones worldwide in the first quarter alone, according to research firm Gartner.

Mr. Ma of IDC said Apple's market share is still growing rather fast, and he doesn't think it's too late for Apple to move into China.

IDC expects the Chinese PC market will grow at about a 22 percent clip annually over the next five years, and that smartphone penetration is seen increasing as well, which will create more opportunities for Apple.

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Source: IDC.