Why the iPhone Will Change the Chinese Phone Market

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A woman stands in front of iPhone accessories displayed in a shop in Shanghai on Aug. 28, 2009

It should hardly be a surprise that the iPhone is coming to China. Apple Inc.'s iconic mobile device is manufactured here, and an estimated 2 million have already been sold on the gray market on the mainland. But a deal announced on Aug. 28 by China Unicom, the country's second largest mobile service provider, will make the phone available to hundreds of millions of mainland consumers, opening a huge new market to Apple. China now has nearly 700 million mobile phones in use, almost as many as the next two largest mobile-phone nations — India and the U.S. — combined. "Apple needs a good international success story to keep their momentum going, and China is a great candidate for that," says Duncan Clark, chairman of BDA, a Beijing-based telecommunications consultancy.

Of course, it will be a long time before the iPhone is commonplace in China. The typical phone here is a $100 Nokia. China Unicom hasn't named its price for the iPhone 3G and 3GS models that it plans to bring to the market this fall, but with a gray-market 3G iPhone now going for about $575 in China, the device will be far beyond the means of the average Chinese phone buyer.

Yet as its population grows wealthier, China should become a more important part of Apple's sales. Once the iPhone is released on the mainland, it could occupy as much as 5% to 6% of Apple's global sales, says Zhang Jun, a Beijing-based analyst with the research firm Wedge MKI. Zhang believes that in the near future, China could make up as much as 10% of the world's iPhone market, which has reached 26 million units in the past two years. "It will add a lot of sales," he says.

Still, some analysts question whether China Unicom will have the marketing and customer-service skills to drive iPhone sales. The company has 140 million wireless customers, compared with market leader China Mobile's nearly 500 million. While the iPhone comes with a marketing halo that few Chinese companies can match, it will be up to Unicom to harness that. "Unicom has never missed an opportunity to miss an opportunity," says Clark. "But this might be the time they transcend that." The agreement with China Unicom is not exclusive and offers no revenue-sharing for Apple, meaning the U.S. computer maker could seek other options. "I think Apple is still considering other channels beside China Unicom," says Zhang. "I've heard they are talking with retail stores."

The iPhone to be released in China this year will come without wi-fi communications capability, a concession made earlier to comply with Chinese regulations that restrict the technology to promote the domestic WAPI standard. Those rules have since been eased, and Apple and Unicom are now hurrying to bring wi-fi phones to the Chinese market, Clark says. In the meantime, they may have trouble selling their hobbled models. "In my view, it will be a challenge to sell these dumbed-down models. Chinese consumers are savvy," Clark says.

Despite those initial barriers, the iPhone seems likely to transform the mobile-phone market in China. While smart phones occupy just 10% of the Chinese mobile market now, that will jump to as high as 30% next year, Zhang says. Apple's model may take time to expand its market share, but it has already forced wireless giants like China Mobile to react. In July the world's largest mobile carrier said it was developing its own smart phones using software based on the Android operating system and manufactured by Dell, Philips and Samsung. If you want to know the system's inspiration — and competition — you need only look at its name: the OPhone.