Why Apple Isn’t Making a Low-Cost Smartphone for China

C. Custer
10:30 am on Jan 18, 2013

We all know that China is important to Apple (even if you didn’t know it already, Tim Cook’s recent visit to China surely must have driven it home). It’s becoming Apple’s biggest market, but with average salaries still far below those of most Western countries, Apple needs to do more if it wants average Chinese people buying its products. To that end, it recently rolled out an installment payment plan and there are rumors that the company is considering making a low-cost smartphone in part to help capture a bigger slice of the Chinese smartphone market. The former is a great idea, and the latter is a terrible one. Here’s why:

A cheap smartphone ruins Apple’s brand image. Even more than in the west, Apple products are a luxury item and a status symbol in China. Part of the fun of buying the newest iPhone is showing it off on the street, and posting pictures of it to your weibo account. If every Li, Zhou, and Wang on the street is also carrying an Apple phone, showing off your own iPhone is going to be a lot less fun. There’s a reason Louis Vuitton doesn’t offer low-cost handbags, and that’s the reason why Apple won’t market a low-cost smartphone in China.

The only reason to sell one would be if Apple wants to abandon its slice of the luxury market (i.e., the customers it has in China now) in hopes of capturing a bigger slice of the low-cost market. But Apple probably doesn’t want to do that because…

Apple can’t compete and keep the margins it wants in the low cost market. Apple makes a ridiculous amount of profit off of its mobile devices. Seriously, the margins are so huge they border on offensive. But if Apple were to go after the low-cost market, it would have to settle for the same razor-thin profit margins and selling-at-cost because everyone else in the market is doing that. Xiaomi, for example, offers a pretty convincing competitor to the current iPhone at less than half its price. I’ve owned both phones, and I can honestly say that the only place I noticed a difference was in the camera (the Xiaomi’s camera is definitely worse).

If Apple were to start selling low-cost smartphones, though, it would be competing with Xiaomi, Meizu, and all the other low-cost, high-performance smartphones head to head. To offer similar performance at the same price points as those phones, Apple would have to slash its own profits. Even if the company was willing to do that (which I doubt), it would still have to compete with some pretty convincing homegrown alternatives even as its status as a luxury brand began to fade and the “cool factor” started to wear off. If the iPhone costs $700, Apple has nothing to fear from Xiaomi. But I think a $300 iPhone would face very serious challenges from a number of local competitors, and given the razor-thin margins, I don’t think any of it would be worth the effort.

Plus, adding more iPhone models would hurt Apple’s media domination. When an Apple mobile product launches in China it’s an event, and not just because some of the launches seem to end with violence. True, Apple’s marketing and media manipulation skills are incredible, but part of the reason for this is simply that Apple doesn’t release products that often. The more phone models it offers, the less exciting each new launch is. And that means less discussion on social media (a new Apple product now can dominate Sina Weibo’s trending topics list for days), less discussion in regular media (remember this?), and ultimately less overall interest.

I could be wrong of course (it wouldn’t be the first time), but if Apple launches a cheap smartphone in China I will be very surprised. Selling old models at reduced prices is one thing — that just reinforces that the newest model is the status symbol everyone should want — but selling a new model at a low price is quite another. Could it happen? Sure. But will it? No, it almost certainly won’t.

  • http://www.jeremyjustice.net Jeremy

    While I agree with your statement that they wont do this (now), I’m not sure the margin argument holds up here. Nokia for years sold lower-end devices that commanded far higher gross margin percentages than their competitors. This was mainly due to their brand being able to pull in a couple extra dollars here and there for the equivalent Chinese brand. Apple does still have enough brand cachet to do the same.

    What would prompt them to do this?

    1. A value-proposition that was able to effectively segment out their lower-tier from their higher tier. It would have to be so obvious that most current iPhone buyers would stay high-end and balk at the restrictions imposed by a lower-price device. This is what I think their biggest challenge would be.

    2. It would open up a significant amount of the market number-wise that even what small hit it would expect to take on gross margin percentage would be offset by huge influx of cash maintaining or expanding their overall gross margin dollars.

    3. The increase in users, helped make their services more profitable (i.e. app store, iTunes). I personally don’t think this is a huge driver for them right now, but worth thinking about.

  • Mona

    Good thoughts but apple risk losing market share to android in the long run. Apple may be winning now but not quite so in the future

  • njren

    The only issue I see is that “every Li, Zhou, and Wang on the street” already *is* carrying an iPhone. The iPhone may still carry the cache of status, but if anyone in China is actually impressed by seeing someone with one, they don’t get out much.

  • http://www.techinasia.com C. Custer

    @ Njren: Actually, I’m guessing it’s you that doesn’t get out of the big cities like Beijng and Shanghai much. iPhones account for something like 5% of the smartphone market in China, and of course plenty of people still don’t have smartphones at all. The vast majority of Chinese people do not have iPhones, and while you’re right that it may not impress much in Beijing’s CBD, elsewhere it’s a different story.

    @ mona: The question is what market, though? Apple has already lost the cheap smartphone market to Android, 100%. That fight is over. Launching one, might help it try to get some back, but that would probably come at the cost of its high-end smartphone market share.

  • njren

    Actually Mr. Custer I live in neither city and I travel the highways and byways plenty, thank you.

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