"Only A Dozen Customers Showed Up To Buy iPhones" - Apple's China Expansion Already A Flop?

In an age with no earnings growth, the most important thing is the "story", primarily applicable to early-stage tech stocks, where the only thing that matters is growth potential if not present or near-term revenues, and certainly not earnings. Unfortunately for some more mature companies like Apple, that have lost their innovative flair and creative genius (with the passing of Steve Jobs), they too have no choice but to revert to the "story" meme, such as the one that Apple's recent and much delayed foray into China with the help of China Mobile, and its 750 million users, would result in a surge in revenue: after all just think of the millions of potential customers - so easy a 5 year old can visualize it. Unfortunately for Apple, even though its stock has gotten a recent boost as a result of the pick up in hopes of what China's addressable market may mean for the company's top line, the story is a bust.

The NYT reports that if judging by the initial response to Apple's expansion into China, then this too latest Apple "rollout" is set to be a major flop. To wit:  " Apple has been counting on a long-awaited agreement with China Mobile, the world’s largest cellular operator, to reverse its fortunes in China. If the muted reception Friday, when customers were finally able to buy iPhones from China Mobile, is any indication, the companies may have to work harder to whip up enthusiasm. Instead of the round-the-block lines that have greeted Apple product introductions in China and other countries in the past, only about a dozen customers showed up to buy iPhones at the opening of a store in Beijing — despite the presence of a special guest, the Apple chief executive, Timothy D. Cook."

Why the dramatic cooling toward what was once the, pardon the pun, coolest brand around? Simple: Apple missed its window of opportunity.

Apple was once an iconic brand in China, where its phones have been sold for years by the second- and third-largest mobile operators, China Unicom and China Telecom. But it has lost ground to the market leader in smartphones, Samsung Electronics, and cut-price domestic rivals.


Its market share has fallen into the single digits.

A testament to how much the company is betting on its China expansion was Tim Cook’s trip to Beijing. Unfortunately not even his presence did anything to stir spirits and drum up any interest in Apple's latest (NSA-endorsed) creation.

“Apple used to be the must-have, aspirational brand for all wealthy and middle-class Chinese consumers,” said Shaun Rein, the managing director of CMR, a market research firm, and the author of “The End of Cheap China.” “But over the last year, there has been a real deterioration of the Apple brand.”


Apple is just the latest of a number of American technology companies to fall on harder times in China. Google was once a leading search engine in China, but then lost ground to a local rival, Baidu. Motorola was once a power in mobile phones in China, but then lost ground to Nokia of Finland — which, in turn, yielded leadership to Apple, Samsung and others. More recently, Cisco Systems, the maker of telecommunications network equipment, said that sales in China had been hurt by disclosures of surveillance by the United States National Security Agency.

Well if you must blame Big Brother go for it. After all  there is a "story" to defend.

And then there is the whole pricing issue.

On Sina Weibo, a microblogging service, some users complained about the pricing of the iPhone 5S by China Mobile, saying they could get smuggled versions for less money.


“The model is the same,” one contributor wrote on Weibo. “I want the cheaper one.”

Even if enthusiasm picks up, the reality is that the bulk of the new user pick up will not be incremental growth but switchover from other networks:

in addition to the agreement with Apple, China Mobile has another big advantage over its two rivals — the fast new network it is building, using so-called 4G technology. China Unicom and China Telecom are still relying on the slower, previous generation technology.


But this is a mixed blessing for Apple, because analysts say some China Mobile iPhone sales will come from customers switching from China Unicom or China Telecom. As a result, estimates of iPhone sales by China Mobile, which have ranged from less than 10 million annually to more than 30 million, might overstate the overall benefit to Apple.


Over all, including the effect of customers switching from rival networks, Mr. Zhang said he expected Apple to sell about one million more phones a month in China as a result of the deal, on top of the roughly three million it has been selling.

In conclusion, "An Apple spokeswoman, Carolyn Wu, said the company did not plan to report first-day sales figures." One can see why.

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