1 May 2020 | By DF
This is a 9-part essay series on Apple’s Success in China. Part 1 introduces the essay series. Part 2 explains Apple’s product-zeitgeist fit in China. Part 3 looks at product localization. Part 4 looks at Apple’s services in China and relationship with Tencent. Part 5 looks at the complexities of operating in China. Part 6 and Part 7 look at Apple’s compliance efforts in respect of the App Store and iCloud respectively. Part 8 looks at Apple’s investment in DiDi. Part 9 concludes with lessons from Apple’s experience in China.
This essay will begin by elaborating on Apple's success in China, circa 2020 AD. It will then go briefly into Apple's history in China, before arguing that Apple's iPhone achieved the mythical product-zeitgeist fit in China and that Apple's business model uniquely enables its success in China. Finally, it will briefly note the how Apple has organized itself differently in light of its China operating segment. This last point is a foreshadow to the subsequent parts of this essay series, which discusses how Apple has made changes to cater to the Chinese market.
Let's dive in.
The extent of Apple's success in China is under-appreciated.
Thus, Apple has the dual honor of being the only non-Chinese company with significant market share as a smartphone vendor and as an operator of Internet services.
https://twitter.com/benedictevans/status/1263529903984607234
https://twitter.com/benedictevans/status/1263529903984607234?s=20
Selling iPhones
In 2020, the smartphone market has saturated worldwide as well as in China.((Among Chinese Internet trends, the only exponential growth that is likely to continue is mobile data traffic, whose increase far outpace the number of Chinese Internet users. This trend will likely continue with the implementation of 5G networks, with peak data rates up to 100 times faster than current 4G networks. Setting aside the sound and fury surrounding “the 5G race” and Huawei, the Chinese government’s policy to roll out 5G via the three state-owned carriers is likely accelerate 5G implementation.)) Apple is by far the most profitable smartphone maker (~75% of industry profit, according to WSJ) and approximately 20% of its revenues comes from China.
Statistics on the Chinese smartphone market typically reports on number of smartphones sold by each vendor in each quarter. This glimpse at a flow concept is a proxy for overall market share but does not account for the varying lifespans of different smartphones (high-end vs low-end, iOS vs Android).
According to Morgan Stanley's Katy Huberty, Apple's China install base is 19.5% in 2019, but this is probably quite unevenly distributed throughout different parts of China. For example, this Tweet from Dec 2017 suggests the iPhone had a almost 50% market share in Beijing—this is comparable to iPhone's market share in the US as a whole.((As far as I know, there is no reason for China Unicom to have a disproportionately larger base of iPhone users.))
From these, we can fairly characterize the Chinese smartphone market thus: Apple is holding onto the high-end, with some competition from Android makers like (in descending order of market share) Huawei, Oppo, Vivo, and Xiaomi. This is not necessarily the end-state of the Chinese smartphone industry.((Notably, the fact that Samsung, a manufacturer of premium Android in other markets, today has a negligible market share in China highlights how difficult it is to sustain differentiation as an Android manufacturer.
Samsung’s fate is best attributed to the open-source nature of Android. Google’s strategy for Android has always been a defensive moat for its core search business by making “any layer that lives between themselves and the consumer and make it free” (Gurley, 2011). But a free, open-source operating system also means that competing Android manufacturers are tied to a common base, from which it is difficult to achieve differentiation. From the perspective of Chinese smartphone manufacturers that were previously stuck with low-value low assembly, Android has been a boon, significantly lowering the software barriers to entry. While the smartphone market was rapidly growing, there is space for a variety of Android manufacturers to enter the space. But now that the smartphone market has matured, consolidation is inevitable.
In contrast, Apple, with its integrated approach to software and hardware, is able to create and sustain a more differentiated product offering and thus hold on to its market share through these structural changes.))
But one can at least predict that, in a mature market, there is little free energy for new players to enter and acquire significant market share. Expect more zero-sum battles for market share among the remaining players.
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