Apple is a perfect fit for China

Apple staff welcoming customers in the new Apple store at WangFujin business district in Beijing on October 20, 2012.

STORY HIGHLIGHTS

• Apple CEO Tim Cook expects China to become the No. 1 market for the company
• Jeongwen Chiang: Google or Facebook can only watch with envy
• He says Apple mainly sells hardware, which doesn't run into censorship problems
• Chiang: iPhones and iPads are also considered status symbols among elites

Editor's note: Jeongwen Chiang is professor of marketing and chair of the department of marketing at China Europe International Business School.

(CNN) -- Apple CEO Tim Cook expects China, the world's most populous country, to become the No. 1 market for the company.

Equally heavyweight tech companies Google or Facebook can only watch with envy. It is not because of lack of effort that they are nowhere near the success of Apple in China. Their businesses are just too different.

The Chinese government's tight control on freedom of information flow applies especially to the Internet. Web access is filtered on a regular basis. Social media websites such as Facebook and Twitter are blocked because the government deems them as potential hot spots for facilitating politically sensitive or socially inappropriate content.

Meanwhile, Google is operational in China but has to route all searches to its Hong Kong site, and the access is often interrupted. So, it is fair to say that the Chinese government is the reason why companies such as Google and Facebook are not doing well in China.

Jeongwen Chiang

In contrast, Apple mainly sells hardware, so it has not run into any censorship problems.

Chinese consumers love electronic gadgets. Mobile phones are ubiquitous. Apple is doing incredibly well because its products are so much more attractive and pricy. The iPhone quickly become a status symbol product in Chinese social circles since its debut. Likewise, the iPad also joined the must-have list as soon as it was launched.

If someone wants to lubricate his "guanxi" -- relationship -- with an important person, these two products are often the gift of choice. Before the iPad reached China, a businessman in Shanghai told me that in the back of his car trunk, he had stocked at least 20 iPads, all bought in Hong Kong. "It is the most-loved present for government officials," he claimed.

The social pressure of having an Apple product is strong, especially as the wealthy elites set the trend. If a middle class Chinese consumer cannot afford an expensive car or watch, sporting an iPhone may be just as good. Even the bad press surrounding Foxconn, the main manufacturer of Apple products, did not make too much of a dent on the company's sales.

There is no doubt that China will be an important market for Apple in the coming years. Among the three main telecommunications companies in the country, China Mobile is the only one without Apple's iPhone support despite the fact that it is the largest operator with nearly 700 million subscribers. Many high-end China Mobile customers still stay in 2G network because China Mobile's 3G network does not have iPhones. If China Mobile gets its own version of iPhone, as rumor has it recently, then it would be a shot in the arm for Apple.

Interestingly enough, Apple's growth in China is all from its hardware.

Its iTunes store sales from music, videos, books or apps downloads are almost negligible. This has nothing to do with the government. There is no censorship of iTunes other than Apple's own self-screening mechanism.

Poor sales from iTunes store owe more to the fact that the Chinese are habitually reluctant to pay for intellectual properties. To make things worse, there are so many websites that offer "jailbreak" tips so that people can easily bypass Apple and get free downloads elsewhere.

There are rumors that Apple might consider adding a cheaper version of the iPhone for the Chinese market. In light of the fast growing smartphone market, cheaper phones seem to make sense especially since there are still millions of Chinese who cannot afford a pricy iPhone of 5000 yuan (roughly $800 dollars).

But Apple should stay away from the idea.

It does not make sense to sacrifice profit margin just for a greater market share. Doing so would tarnish the premium image of Apple and erode the love and loyalty of the elites. One lesson that Apple can learn is that not long ago, Nokia used to own the Chinese market but it became so popular that it lost its appeal to the elites. Nokia ended up trying a new brand, Vertu, to entice consumers, but it was not very successful.

By building more retail stores in China, Apple would certainly accelerate its growth. But the challenge is to maintain its prestige so that consumers would not lose interest and crave for a new elite brand.

Apple might also want to rethink its iTunes Store business model in China so that it can generate sales in other ways. Hardware comes and goes. One day, Apple products can and will be replaced. But demand for books, movies, music, and apps is ongoing.

Will Apple find a way to tap into the Chinese consumption for content? We'll just have to see.

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The opinions expressed in this commentary are solely those of Jeongwen Chiang.

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