Sunday 8 November 2009, 14:00. Copyright of CNMI China Market Intelligence.
Apple officially introduced the iPhone in China last week. Through a partnership with one of China's telecom providers, China Unicom, the company had hoped that its launch here would be as successful as it was in the US and Europe. Sales have been very disappointing however, with only 5,000 subscribers signing up so far. To many, this comes as no surprise. There are two camps among those that have been following Apple's plans in China: the optimistic, fair weather analysts that remain convinced the iPhone will do well; and the more cynical camp where general opinion is that Apple should be lucky to sell any iPhones in China at all, considering the amount of fakes that already flood the market.

There is some truth to both sides' arguments but as always, it is important to realize what exactly is going on here. First of all, let's look at the deal Apple made with China Unicom to distribute and sell its phones. While the introduction of the handsets in the US and Europe was based on a revenue sharing model that split profits between Apple and its telecom partner; in China, Apple has basically just agreed to sell 5,000,000 iPhones to China Unicom at a price of 2,000 yuan per unit. This is a clever strategy by Apple to reduce their risk, because if China Unicom can sell 5 million phones, they know their product works. On the other hand, if they do not, Apple still walks away with a 1.5 billion USD deal. So, in breaking with their traditional way of doing business, Apple must have realized there was some risk associated with the iPhone introduction in China.

This risk, of course, lies in the knowledge that there have been millions of 'iPhones' in China for months prior to the official launch already. Many of them bought in the US or Hong Kong, but most of them nearly identical copies produced in China and sold at a fraction of the price that the real ones are now going for. The iPhone is being sold by China Unicom for 5,000 yuan ($732) or more in a standalone deal. The phone is subsidized only if purchased as part of a subscription package, starting at almost 150 yuan per month. Besides the fact that such subscriptions are not very popular in China, it simply makes the phone too expensive compared to its fake or smuggled counterparts. Most people will always prefer a real product as opposed to a fake one. Many will consider paying more for it, if the price is right. In this case, the price is not right - as a fully functional and identical fake iPhone costs one tenth of the original phone sold by China Unicom.

Price differences are not the only problem caused by fake and smuggled goods. The nearly year-long exposure to the iPhone that the Chinese market has now had suggests that the iPhone's potential market share is going to be capped at a far lower percentage than it otherwise would, simply because most people who would want an iPhone already have one by now. The phone is no longer a novelty. It is a very small group of people that said, back in 2008, "No, instead of buying an iPhone abroad or a fake one in China, I will wait one year for the phone to be introduced here officially, and then pay 5,000 yuan for one".

The more optimistic analysts seem to have a lot of faith in the Chinese consumers. Surely, in a market of 700 million mobile phone users there is enough room for the real iPhone, especially when as China develops and GDP increases, more and more Chinese customers will see the merit of owning a genuine product? They look at numbers and see such staggering figures that even if just a tiny percentage of those were to go towards Apple, the profits would still be great. The good news for these people is that it seems like Apple's initial target of 5 million sales was already reached before the official launch date. Whether these phones will ever make it to the customer (or remain in a China Unicom warehouse for years to come), remains to be seen.