In China, Apple Finds a Sweet Spot

@nytimesThe New York Times

In China, Apple Finds a Sweet Spot

SHANGHAI — A year after opening a flagship store here, Apple has a problem that any retailer would envy: the huge 16,000-square-foot space is already too small.

Huge crowds descend the store’s glass staircase, only to discover legions of mostly young Chinese crowding around spare displays of Apple’s devices. Another Apple Store, four miles away, is also packed.

To cope, Apple says it is now planning a third, even larger Shanghai store, as well as dozens of other stores throughout the country. The expansion is driven by customers like Wang Shangyan, a 17-year-old professed Apple maniac.

“I have many Apple products, like Touch, iPod, iPad 2 and MacBook,” Mr. Wang said after browsing the Apple Store here this week. “I don’t have an iPhone but I’m waiting for the fifth generation. I will come to the Apple Store to buy it; it doesn’t matter how much it costs.”

Apple says its Chinese outlets — two in Beijing and two in Shanghai — are now the four most heavily trafficked Apple stores in the world. They also generate the most revenue, outselling even the Fifth Avenue Apple Store in Manhattan, which is open around the clock. (Apple plans to open another store in Grand Central Terminal.)

Analysts say few global brands have achieved such a feat in China.

“Apple has done what Google and Facebook cannot do: become No. 1 in China,” said John Quelch, former senior associate dean of Harvard Business School and now head of the China Europe International Business School in Shanghai. “Scarcity sells, and this is the same strategy Apple has used in the U.S.”

Apple’s push into China may be important for other reasons: it shows the depth of this country’s fast-growing upper middle class.

Foreign brands can absorb another lesson as well. Apple’s success shows that with products that are not so easy to counterfeit, Chinese consumers are willing to pay a premium.

The Apple Store, however, is another matter.

Last week, an American blogger living in China posted images of what she believed was a fake Apple Store in the southwestern city of Kunming. The store mimicked the Apple decor, right down to the bright blue T-shirts and white tags Apple employees are required to wear.

“It appears the middle class in China is growing faster than Apple’s presence,” said Charles Wolf, a securities analyst who follows Apple for Needham & Company.

“I mean China has taken rip-offs to a new level, pirating Apple Stores themselves. It speaks to the demand for Apple products throughout China.”

Apple declined to comment on the case. The company has no authorized store in Kunming, only licensed resellers, which are barred from creating look-alike outlets or even calling themselves an Apple Store.

On Friday, China said its own regulators had begun inspecting electronics stores in Kunming to ensure they complied with the law.

Chalk it up to Apple mania, with Chinese characteristics.

Scarcity does seem to be feeding the frenzy. Shortages, bottlenecks and delays have created a thriving gray market in Apple products in China, with many consumers paying hefty prices for iPhones or iPads that have been smuggled in from overseas, ahead of the Chinese release date. Apple said recently its bottlenecks had eased.

Last week, Apple reported blockbuster sales and profits in its third quarter, including $3.8 billion in revenue in greater China, which includes Taiwan and Hong Kong.

For the first three quarters of Apple’s fiscal year, revenue in greater China was $8.8 billion — six times that of a year earlier. Last quarter, Apple may have even generated more revenue in China than Lenovo — the Chinese PC maker that seven years ago acquired I.B.M.’s personal computer business, according to a survey by Bloomberg News.

China has become the second-largest market after the United States for apps that run on the smartphone and tablet, according to Distimo, a Dutch company that tracks the popularity of apps. Strong sales of the iPhone and iPad are also helping drive up sales of Apple’s other major products, including desktop computers and laptops.

Apple mania has even inspired grass-roots inventors. A year ago, a 22-year-old programmer and his 25-year-old brother introduced what they called the Apple Peel, essentially a case they said helped turn an iPod into a smartphone capable of making calls.

More recently, a young man released a 19-minute video on Youku, China’s version of YouTube, showing how to make a look-alike iPad from scratch.

This has all helped make Apple seem even cooler. Introductions of new Apple products, though, can be dangerous. Last May, a huge crowd that lined up to get the white model of the iPhone 4 turned unruly and shattered a door at one of Apple’s stores in Beijing.

But how is this going over with the Chinese government, which has been known to create barriers for foreign brands seeking to sell directly to Chinese consumers?

It can easily tie up companies with red tape and regulatory hurdles.

Analysts say Apple has found a sweet spot. The company is operating in the relatively open retail market, where restrictions have been eased. And Apple products do not compete head-to-head with those made by state companies. For instance, there are no major state-owned mobile phone makers.

In fact, Apple has been eager to team up with state-run telecom companies, which control the all-important mobile phone subscriptions. Apple sells its iPhone with service provided by China Unicom, and analysts say the company is now in talks with the country’s other big telecom operators, China Telecom and China Mobile.

What could go wrong for Apple? One of the biggest risks, analysts say, is that Apple moves into social networking or cloud computing, both of which pose a challenge to the Communist Party censors.

The government has blocked Facebook and Twitter and is putting the squeeze on Google, Gmail and the company’s new social networking tool, Google Plus, which is already blocked.

Gu Jinglu contributed research in Shanghai.

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