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The Surprise in Apple’s Cheaper iPhone? In China, It’s Expensive
Cheaper iPhone Will Cost More in China
(about 11 hours later)
TOKYO — Apple’s new iPhones took a step closer Wednesday to being offered by the world’s biggest cellphone carrier, China Mobile, when the Chinese government approved the handset to run on the carrier’s next-generation network.
SAN FRANCISCO — With the introduction of a cheaper iPhone on Tuesday, Apple took a step toward catering to China, the world’s largest smartphone market and one that is crucial to the company’s future.
Rather than celebrating, though, the Chinese were raising their eyebrows over the cost of the new models -- especially one that had been billed as a cut-price iPhone.
But the cost of the phone — more than $700 in China — will still keep Apple’s phones beyond the reach of most Chinese consumers. And that predicament only underscores what has become increasingly clear in recent months: that Apple’s fortunes in China largely depend not on any phone, but on reaching a deal with China Mobile, the country’s largest cellphone carrier.
While many analysts had expected Apple to price the iPhone 5C at about $400 in an effort to attract new customers in mainland China, where the company has been struggling, it will actually go for significantly more.
On Wednesday, Apple took another step in that partnership, when the Chinese government said that Apple’s phones could run on China Mobile’s new cell network, essentially paving the way for a deal between the companies.
Apple said on its Web site that the iPhone 5C would start at 4,488 renminbi, or $733, without subsidies from mobile operators. That is not far below the price of the new flagship Apple iPhone 5S, which starts at 5,288 renminbi. Both phones were officially announced in California on Tuesday.
An agreement would instantly give Apple access to China Mobile’s 700 million customers, and reaching it might require Apple to bend on price. China Mobile has been holding out on a deal for years, and it is now positioned to ask for better terms with Apple.
“If you look at the price, it’s clearly a high-end phone, not a low- or even midrange phone,” said Jenny Lai, an analyst at HSBC in Taipei, referring to the iPhone 5C.
“The only way they’ll have a significantly better time in China over the next 12 months is if they can sign China Mobile,” said Jan Dawson, a telecom analyst for Ovum. “A small percentage would be a large number of new customers for Apple. So it’s even more crucial now that Apple gets that deal done.”
The price is about 33 percent higher in China than the full, unsubsidized $549 cost in the United States. Chinese carriers don’t generally subsidize the handset price for consumers but they often discount their monthly bills. So the eventual cost to consumers has plenty of room to come down.
Apple has recently pursued an aggressive strategy for China. For the first time, Apple’s new phones will be released in China at the same time as they are in the United States. Analysts say the new gold color being offered for the higher-end iPhone 5S was probably designed for wealthy Chinese who enjoy flashing smartphones the same way they show off jewelry. And Apple has tailored some software features of its products for the Chinese, including easier setup for Chinese e-mail services.
But given that Apple has been losing ground to lower-cost rivals in China, some of which make smartphones that sell for less than $100, will the 5C be able to turn around the company’s fortunes there?
China’s cellphone market is growing quickly, surpassing the American market last year. But so far, most Chinese consumers are gravitating toward cheap Android smartphones that can be bought for as little as $100 at full price from handset makers like Xiaomi, Huawei and ZTE.
After the announcement, the stock prices of several Apple suppliers fell sharply, including that of Pegatron, a company based in Taiwan that is the main assembler of the iPhone 5C. Analysts said sales might fall short of expectations in China unless Apple lowered prices.
Apple has been left as No. 6 in the Chinese market, and sales of its products in the country were down 4 percent in the second quarter compared with the same period last year. Though Apple is still enormously successful, its profit growth has slowed and its stock price has struggled. On Wednesday, the company’s shares fell more than 5 percent.
“If they had been able to get down in the $350 to $400 range, we would have seen a big bump in the fourth quarter,” said Francis Sideco, an analyst at IHS, a research firm. “They’ll still get a bump, but this would have accelerated it.”
In exchange for adding Apple to its lineup, China Mobile may demand that Apple help subsidize the cost of the iPhones. It might ask for a better cut of each iPhone sale. Or it could just ask for a more lax contract, in which it can reduce the prices of the phones. In the United States and some European markets, Apple has forbidden carriers from discounting the price of the iPhone.
Investors may also have been disappointed by the absence of an agreement to sell the phones through China Mobile, the biggest network operator in China, and the world, with 745 million customers.
“With every passing month, China Mobile is getting stronger and Apple is getting weaker,” said Tero Kuittinen, a mobile analyst for Alekstra. “We have a moment where all of the cards are in China Mobile’s hands.”
Although China Mobile has been the biggest iPhone holdout, expectations of a deal have been fueled by the fact that the new iPhones are compatible with a technology called TD-LTE, which is employed in the next-generation wireless network that China Mobile is building. But that network is not yet operating.
When the new iPhones, the 5C and 5S, are released on Sept. 20, they will be available through two other Chinese mobile carriers, China Unicom and China Telecom, which together have more than 400 million subscribers.
The Telecommunications Equipment and Certification Center, an arm of China’s Ministry of Industry and Information Technology, posted a notice on its Web site certifying that it has approved iPhones for use on TD-LTE networks, a necessary regulatory step.
Apple said on its Web site that the iPhone 5C, the cheaper model, would start at 4,488 renminbi, or $733, without subsidies from mobile operators. The new flagship iPhone 5S will start at 5,288 renminbi, or $864. That price is more than one-third higher in China than the $550 unsubsidized cost for the iPhone 5S in the United States.
With sales of phones from Chinese companies like Huawei, Lenovo, Xiaomi, Yulong Coolpad and ZTE growing rapidly, Apple’s share of the Chinese smartphone market fell to 5 percent in the second quarter, according to Canalys, a research firm.
Apple products have always been more expensive in China than in the United States — even though iPhones are actually assembled in China. That is because iPhones sold in China are subject to a 17 percent value-added tax, while those that are exported can be sent abroad tax-free.
Chinese phone buyers are especially price-sensitive because of the way the market is structured. Although carriers in the United States and Europe generally provide upfront subsidies, disguising the true cost of the phone, Chinese network operators typically sell phones at full cost and then, in some cases, provide discounts on monthly bills.
The cost in mainland China is also higher than it is in Hong Kong, where there is no value-added tax or sales tax. There, Apple announced a price of 4,688 Hong Kong dollars, or $604, for the iPhone 5C.
The lower-price iPhone 5C will cost more than twice as much as rival devices like the Xiaomi Mi3, which starts at $327.
Yet even with that 17 percent factored in, Apple appears to be marking up the iPhone 5C substantially in China, potentially giving the company room to maneuver later. Chinese carriers do not generally subsidize the handset price for consumers, but they often discount their monthly bills. So the eventual cost to consumers has plenty of room to come down.
“By any standards, it’s a premium price,” Mr. Sideco said. “When you really look at it, they didn’t make a cheaper phone. They made a more expensive phone so that they could call the other one a cheaper phone.”
Some analysts said Apple might have announced a high initial price in China to justify eventual price cuts. If an agreement with China Mobile were to come soon, Apple could then reap a marketing benefit by cutting prices just as it gained access to a vast new consumer base.
The iPhone 5C comes in a plastic case, and its hardware is nearly identical to that of the iPhone 5. The iPhone 5S has an aluminum body, a faster processor and a fingerprint scanner, as well as other features.
Ben Bajarin, a technology analyst for Creative Strategies, a consulting firm, said it was possible that China Mobile could trim the cost of the iPhone 5C and use the device to lure customers into paying for more expensive smartphone plans.
Some analysts said Apple might have announced a high initial price in China to justify eventual price cuts. If an agreement with China Mobile comes soon, Apple could then reap a marketing benefit by cutting prices just as it gains access to a vast new consumer base.
“That’s the one thing the iPhone’s been remarkably good at,” he said, “is driving value to the premium data service.”
Apple products have always been more expensive in China than in the United States — even though iPhones, for example, are actually assembled in China. That is because iPhones sold in China are subject to a 17 percent value-added tax, while those that are exported can be sent abroad tax-free.
Eric
Pfanner reported from Tokyo.
Yet even with that 17 percent factored in, Apple appears to be marking up the iPhone 5C substantially in China, potentially giving it room to maneuver later.
Eric Pfanner reported from Tokyo.
“It looks like they are trying to test the market,” said Bryan Wang, an analyst at Forrester Research. “How much are Chinese consumers willing to pay for the phone?”
The cost in mainland China is also higher than that in Hong Kong, where there is no value-added tax or sales tax. There, Apple announced a price of 4,688 Hong Kong dollars, or $604, for the iPhone 5C.
Price discrepancies between Hong Kong and mainland China have given rise to a booming trade in smuggled and “gray market” Apple products on the mainland. Mr. Wang estimated this business was worth $6 billion to $8 billion yearly.
In the past, smuggling has been fueled by a delay of several months in the release dates for iPhones in China. This time, mainland China will get the iPhone 5C and 5S on Sept. 20, the same day as Hong Kong, the United States and other major markets.
Pending the announcement of a deal with China Mobile, the new phones will be available through two other Chinese mobile carriers, China Unicom and China Telecom, which together have more than 400 million subscribers.
Analysts said Apple could still make the phones accessible to a broader range of Chinese consumers by pushing those carriers to provide substantial subsidies or by accepting lower wholesale prices in return for higher sales.
“Apple, if they want to, can still be aggressive, depending on what they do with the operators,” said Nicole Peng, an analyst at Canalys.
