Apple, Facing Competition, Readies iPhone for Launch in Giant China Market

By LORETTA CHAO, JULIET YE and YUKARI IWATANI KANE Apple Inc. is getting closer to clearing the hurdles to start selling iPhones in China, one of the last major phone markets Apple has yet to tap. The release of the iPhone in China could turbocharge overseas growth for what is already Apple's fastest-growing product. China is the world's largest mobile market by subscribers, with some 687 million subscribers. That compares with more than 270 million subscribers in the U.S. The iPhone hasn't sold as well in some markets as in the U.S. In Japan, for example, the Apple brand isn't as strong, and regular mobile phones offer many of the same features. In China, however, touch screens are hot, and there are already a number of popular models that have no keypads. The Apple name has value as a status symbol, and Internet usage through cellphones is increasing. Steve Jobs iPhone iPhone Apps Smartphones Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., calculates Apple can sell 2.9 million iPhones in China by the end of 2011. "Ultimately, it will probably be the fastest-growing overseas market," he said. But Apple faces competition from other smart phones that are set to launch in China in coming months. And analysts say the iPhone has struggled in overseas markets, where it has faced more competition from rivals like Nokia Corp., the world's largest mobile phone maker. "Apple's brand is strongest at home, where the competition is weaker," said Edward Synder, an analyst for San Francisco-based Charter Equity Research. Apple's iPhone, which launched two years ago, has so far sold more than 26 million units world-wide in more than 80 countries, but the majority of its sales have come from the U.S. According to research firm IDC, only 7% of total iPhone sales in the second quarter, ended in June, came from the Asia Pacific, where it is sold in countries like Australia, Hong Kong and India, compared with 49% from the U.S. and 25% from Western Europe. Other sales come from markets in Japan, Latin America, Canada and the Middle East. An iPhone prototype that was modified for the China market recently received one of the technical licenses the government requires for mobile phones, according to a testing center under the Ministry of Industry and Information Technology. It is unclear how many approvals are required before the phone can be released. Apple must still complete negotiations with state-owned wireless operator China Unicom (Hong Kong) Ltd., which is expected to carry the iPhone, but analysts say those talks are nearing conclusion. Beijing-based research firm BDA China Ltd. said in a report this month that the iPhone is "now finally set to make its official debut in China in October," citing interviews with companies including Unicom. Cynthia Meng, analyst for Merrill Lynch in Hong Kong, said in a report that she also expects the iPhone to launch in the fourth quarter this year, in conjunction with Unicom's planned launch of 3G in October. A China Unicom spokeswoman said negotiations are still being finalized, and declined further comment. A spokesperson for Apple declined to comment. In an earnings call in July, Apple Chief Operating Officer Tim Cook said the Cupertino, Calif., company expects to start selling iPhones in China within a year. Competing products are already in the works in China, adding urgency to the iPhone's launch. China Mobile Ltd., the country's largest carrier by subscribers, plans to start selling smart phones with similar functions to the iPhone this year based on Google Inc.'s Android operating system. On Monday, Taiwanese phone maker HTC Corp. announced it plans to launch seven third-generation phones, including at least one Android phone, with China Mobile by next year. China Unicom, which holds the only license for the WCDMA 3G technology compatible with the iPhone, is China's second-largest carrier. Apple has faced regulatory hurdles to launching the iPhone in China, including having to comply with a government rule that requires the removal of the device's wireless Internet function. Analysts say they expect a later rollout of a Wi-Fi enabled iPhone that complies with newly revised regulations. Launching the iPhone in China would likely boost Apple's small presence in the country. Apple currently has less than 1% market share in personal-computer shipments in China. In the second quarter, Apple sold only about 36,000 units out of 11.7 million PCs shipped in China, according to IDC. One indication of the iPhone's strong potential in China is the thriving underground iPhone market that already exists there. Though the device isn't officially available, BDA estimates there are already 1.5 million iPhones in use in China, and the handset is on sale everywhere from online vendors to resellers of Apple products in sprawling electronics malls. People can use the iPhone and buy applications on Apple's iTunes store by unlocking the device with software that enables it to work with any network operator, even if they aren't approved by Apple. Jessica Wu, a 26-year-old iPhone user in Nanjing, said she bought her first-generation eight-gigabyte iPhone in Nanjing in 2008 for 4,600 yuan ($675). Other high-end phones "seemed expensive and too professional" compared with the iPhone, she said. "The [iPhone's] icons are cute." "People are paying close attention [to the release of the iPhone]," said Ms. Deng, who declined to give her first name, a saleswoman at an Apple reseller in Beijing called Dragonstar. "We've already gotten a couple of phone calls from our clients placing orders for iPhones as soon as they arrive." The iPhone will likely raise China Unicom's profile as it has for other iPhone operators that have seen their data revenue increase. In Europe, the iPhone has just 15% of smart-phone market share but represents 90% of the total data usage on networks, according to IDC. Ms. Meng of Merrill Lynch rated Unicom a "buy," saying the introduction of the iPhone and other data-intensive smart devices "will be critical catalysts for Unicom to retain and attract mid-to-high end subscribers in highly penetrated urban markets." How strongly the iPhone sells in China will depend on the subsidy China Unicom provides for it, analysts say. Chinese consumers spend an average of 1,100 yuan, or about $160, on cellphones, according to BDA. For comparison, the newest iPhone 3GS model starts at $199 in the U.S. with a two-year service contract, and $599 without any service commitment. In China, Apple and its operator partner face another challenge: most users prefer to prepay for services rather than subscribe to a monthly service. Average monthly revenue per user in China is also less than $6, in part because overall charges are lower, compared with about $60 for AT&T Inc., the exclusive iPhone provider in the U.S. Still, the payoff could be huge for Apple. Xiang Ligang, chief executive of Chinese telecommunications news portal Cctime.com, estimates 100 million mobile phone users in China change their phones every year and about 20 million of those buy high-end mobile phones. In some of the biggest cities especially, mobile phones are often seen as status symbols and high-end cellphones typically cost upwards of 3,000 yuan. Write to Loretta Chao at loretta.chao@wsj.com, Juliet Ye at juliet.ye@wsj.com and Yukari Iwatani Kane at yukari.iwatani@wsj.com