According to experts, the problems included a lack of marketing and a price tag set too high for Indian consumers.

Now, as Apple launches the iPhone in China, in cooperation with service provider China Unicom, many are wondering if it will face similar hang-ups in the world’s largest cell phone market, which has more than 700 million subscribers.

China Unicom, the country’s second-largest mobile phone operator, announced it had signed a three-year, non-exclusive agreement with Apple to sell the iPhone 3G and 3GS models in China. Company Chairman Chang Xiaobing told reporters in Hong Kong that China Unicom would subsidise the device, but neither Apple nor China Unicom has released specific details about the price or terms of service.

Excitement about the launch is building. In image-conscious China, the iPhone is considered sleek and fashionable. BDA China, a Beijing-based advisory firm that covers China’s telecom and technology sectors, forecasts the iPhone will take 10% to 15% of the Chinese smartphone market in the next few years.

Still, Apple has considerable obstacles to overcome in China, Wharton experts say. Unlike its US launch in June 2007, the iPhone faces stiff competition in China from a variety of touch-screen devices. The Chinese version of the handset is also somewhat crippled: the first batch to come out in October will reportedly have no Wi-Fi function, the result of government mandates that were rescinded in May after production had already begun.

Perhaps the iPhone’s biggest hurdle is China’s thriving grey market, which has already smuggled more than a million iPhones into the country. Experts say the trick will be to price it right: low enough to drive sales, high enough to maintain its exclusive edge. China Unicom has not announced whether the iPhone will be sold with a contract or not, which would certainly affect its pricing.

Apple may also be at a slight disadvantage in China because of its partnering with China Unicom. “In the US, Apple managed to land a deal with AT&T,” notes Kartik Hosanagar, Wharton professor of operations and information management. “In contrast, in China, Apple could not get a deal with China Mobile, which has the largest share of the market...So, an important factor is that the share of the market that Apple is getting through China Unicom is much smaller.”

Competitive Pressures

One of the biggest question marks concerning iPhone sales is how much the grey market may have already dampened demand. BDA China estimates that more than 1.5 million iPhones have been smuggled into China so far, and many run on GSM networks operated by China Mobile.

The iPhone also faces a host of competing devices in China. China Mobile is expected to partner with Beijing-based Lenovo, Texas-based Dell and Taiwan-based HTC to launch a range of smartphones based on Google’s Android operating system. Rumours are that Canadian firm Research In Motion, which makes the BlackBerry, and California-based Palm are in talks with China Telecom to offer their devices. All will have to compete with the current giant, Finland-based Nokia, which captured 67.3% of China’s smartphone market in 2008, according to Beijing-based CCID Consulting.

Wharton marketing professor Jehoshua Eliashberg wonders how the iPhone will stack up against competitors. Future versions of the iPhone in China (beginning in 2010) are expected to be Wi-Fi enabled, but not having Wi-Fi capability initially could be a disadvantage, given the growing importance of Internet access to Chinese cell phone users.

The competition is all the more difficult for Apple since the brand is not as well known in China as it is in the US, Eliashberg points out. Apple’s iPod, for example, has not been as popular in China as in the US because mainstream Chinese tend to choose lower-end MP3 players.

Wharton marketing professor Z John Zhang is more optimistic. Zhang, who uses an iPhone himself, says people have been using iPhones in China for the past two years and the Chinese-language software installs and works well. “Without any marketing inside China, Apple has managed to sell a large number of iPhones (through the grey market),” he notes. Apple could actually use the grey market to its advantage by capitalising on the iPhone’s existing popularity, Zhang adds.

Zhang sees price and brand maintenance as Apple’s biggest challenges. “It will be very tempting to lower the price and sell to a lot of people. If you do that, you’ll lose the brand equity you have up to this point,” he says. Once the iPhone is widely available in China, “that’s probably going to destroy the exclusivity somewhat. They have to manage that transition process well...(so as) not to destroy the brand image and cachet that is associated with the phone.”

Zhang thinks Apple and China Unicom should keep the price of the iPhone above 1,400 yuan (about $205) to maintain its allure. The price is high—about a month’s salary for a recent college graduate. “The iPhone is not meant for the mass market and I’d be surprised if it is sold as a mass-market product,” says Zhang. “It will most likely target high-end, image-conscious users. Even in that case, there is surely a potential for price wars if you are not careful, as competition is more than happy and willing to drag Apple into the mud.”

New York Times News Service