Taking a Bite Out of Apple: Smartphones in China

This article, "Taking a Bite Out of Apple" , discusses Apple's new strategy to reach the Chinese market and other developing nations, and compares their efforts to Apple's major competitor in this market, Xiaomi. Typically, smartphone devices in the United States, especially during the introduction phase of the product life cycle, have relatively inelastic demand because of consumer perceptions on brands such as Apple and Samsung. Even though these products have hefty price tags, brand loyalty makes these items a necessity rather than a luxury for many consumers who are willing to pay these high prices.

This is not the case, however, in some other nations, and this article discusses China as an example. Just one week before the release of the new iPhone 5c and iPhone 5s, a Chinese firm, Xiaomi released a new device called the Mi-3. Xiaomi was recently founded in 2010 and has already earned billions in revenues and has often been compared to Amazon. The Mi-3 can be purchased at $330 (U.S dollar) compared to the $733 iPhone 5c price tag, and is available directly to consumers online rather than sold in retailers. Xiaomi uses a different tactic from Apple in that they offer the device at a relatively low price, and then sell services to users in order to make a profit as the customers use the phone (just as Amazon sells e-books to Kindle users; i.e. product complements). Also, Xiaomi is receptive to consumer feedback and guided by users, whereas, Apple has a very standard and rigid operating system with limited freedom. Because Apple does not hold the same level of loyalty in China as in other regions, these products can be analyzed as substitutes in the market, and as the first three weeks of sales has shown, Xiaomi is controlling more of the market share than Apple's iPhone devices in China. I personally believe it is in response to the price to consumer value comparison among substitutes available.

Additionally, this article was intriguing because as Apple is penetrating the Chinese market, Xiaomi is attempting to, for the first time, develop new products for the international market. It will be interesting to see the success (or failure) of these competitive efforts.


Dave Tufte said...

Xiaomi's strategy is covered early in the text under two part pricing. The phone is sold cheaply, with producer surplus made off of the follow-up purchases. This is similar to what many cellphone companies in the U.S. already do when they give you a phone at a big discount.

nickwb said...

Interesting article, and good summary of the situation. As I've read a fair amount about Apple Inc. the last few years a number of elements have intrigued me about their business model. First, brand is the name of the game for them. They invest unbelievable amounts of resource and energy on having an incredibly strong brand. In fact, just today in the WSJ there was an article chronicling the most valuable brands. Coca-Cola (who has almost constantly been #1 for a very long time) was booted from the coveted top spot to be replaced by Apple, and then in second place was Google. I agree with the point that here in the U.S. Apple has a much stronger brand image than it might in China, but I would also submit that just as Apple's model has worked here, over time it will slowly gain traction over there.

Another unique approach Apple has taken is not necessarily trying to target the low end of the market and instead works hard to keep their brand image up so that they can keep their prices high and maintain their historically large margins. I don't think the 5C will be any exception to those margins.

While in some regards this Xialam company may be competing with Apple for market share, in other ways, Apple will attract a totally different group of consumers who see them as a superior product and will provide the margins Apple loves to see from their products. It may take some time, but that strong brand Apple has created for themselves will (I believe) fair just fine in the seemingly untouched world of China.

nickwb said...

Here is comment #1

Dr. Tufte said...

MJ: 100/100
nickwb: 47/50 (for poor grammar in the second paragraph).

Dr. Tufte said...

I think nickwb is right: Apple is a hardware company with a strong brand.

I am not sure whether that's a marketable proposition in China.