Apple Might Have to Fight HARDER to Compete in China

For Chinese urbanites, who make up half of China’s 1.3 billion population, the newest model of iPhone costs the equivalent of two months’ pay, an average of $800 USD. Beginning early this year, in an attempt to make the phone affordable for this sector of the population, China’s second-largest wireless carrier China Unicom (NYSE:CHU) gave customers the iPhone 4S for the price of a multi-year service agreement, 286 yuan or $45 per month.

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User data, showing that 51 percent of sales growth in 2010 came from non-voice services, prompted the Beijing-based company to subsidize the newest Apple (NASDAQ:AAPL) smartphone — it was the only one of China’s three national carriers to do so.

Bloomberg reported last January that, “China Unicom is increasingly relying on subscribers who access the Web on their phones as growth in voice traffic slows.”

Yet Unicom’s plan to recoup the costs of the subsidized phone in high-margin service agreements has been a money-losing operation. According to Apple Insider, “a report by China-based tech.sina.com states that China Unicom has not substantially profited from sales of iPhone 4 and therefore may not re-sign its agreement with Apple.”

The Chinese smartphone market poised to overtake the United States as the largest in the world this year. As it stands, numerous home-grown and relatively unknown firms are developing affordable phones in China that have the potential squeeze market share from Apple.

Rueters reported today that, “While iPhone sales will increase in China, Apple’s market share may stagnate or even dip.” This prediction follows the deceleration of growth in the Asian-Pacific market over the last quarter; Apple’s third quarter report showed  a drop in growth from more than 100 percent to 25 percent.

The latest Chinese challenge to the iPhone, Xiaomi’s MiOne, has specifications that exceed those of the iPhone 4S and sells for less than half the price. The phones are so popular they sell out within minutes.

As managing director of Shaghai-based consultancy RedTech Advisors told Reuters, “The sweet spot of affordability in China is 800-1,500 yuan ($130-$240).”  Not $800.

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