iPhone Fights to Stay Cool In China

BEIJING—Apple Inc.'s new iPhone is aimed in part at the growing ranks of straying Chinese power users like James Liang.

From the demo room at the Yerba Buena Center in San Francisco, WSJ's Ian Sherr takes the new iPhone 5 for a spin. Video via WSJ's #WorldStream.

Mr. Liang, chairman of Chinese travel website Ctrip.com, once used an iPhone. Now he uses a Samsung Galaxy Note, which he said lets him more easily peruse documents on the road, thanks to its large screen.
"I've been seeing more middle and upper management using it as well now," he said. "They're probably just following the trend of executives using it."

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Phones in China aren't subsidized by carriers as heavily as in the U.S.

The iPhone's market share "just shows if you have the same product without differentiating it, it doesn't take much for the competition to come and take some of it," he said.
Apple remains the top seller of high-price phones in China, which research firm IDC forecasts will overtake the U.S. to become the world's No. 1 smartphone market by year-end. But its hold on the lucrative niche is slipping, as rivals such as Samsung Electronics Co. and HTC Corp. unveil pricey devices with big screens and fast processors.

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Meanwhile, local players—once content to slug it out in the low-margin, low-cost end of the market, which Apple eschews—are adding to the competitive threat. Telecommunications heavyweights Huawei Technologies Co. and ZTE Corp., and smaller Chinese companies like Beijing Xiaomi Technology Co., have unveiled less expensive phones with competitive specifications.

Apple does have a potentially lucrative way to boost market share, however. China Mobile Ltd., the world's largest mobile carrier, doesn't yet carry the iPhone. A deal would give Apple access to China Mobile's 688 million subscribers.
China Mobile has said it is in talks with Apple about offering a version of the iPhone that works on its proprietary technology. The 4G compatibility of the new iPhone could also help China Mobile introduce the iPhone once the company rolls out its 4G network, which it projected for the second half of next year.
Another path for Apple is through Chinese carriers China Unicom (Hong Kong) Ltd. and China Telecom Corp., which offer subsidized versions of the iPhone.
The iPhone accounted for 38% of second-quarter Chinese sales of smartphones that cost more than 3,000 yuan ($475), according to research group Analysys International, compared with 44% a year earlier. Smartphones running Google Inc.'s Android mobile software claimed a 59% share of the high-end niche in the quarter, compared with 41% a year earlier. Apple sold 2.3 million handsets while Android makers sold 3.5 million in the segment, second-quarter Analysys statistics show.
"We Chinese are used to jumping from one thing to another," said 26-year-old Xiao Qing, who said he switched to an HTC phone from his iPhone 3 more than a year ago. "Today one thing is big and tomorrow people are getting something else," he said.

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China's rapid rise in disposable income has helped make the iPhone a symbol of middle-class status and aspirations. But that quick rise also makes Chinese consumers fickle and eager for the next big thing, analysts said.
"China has had a series of love affairs with one phone manufacturer after another," said David Wolf, founder of consulting firm Wolf Group Asia, citing former China highfliers like Nokia Corp. "Where each [before Apple] failed was in taking that leadership and good will for granted."
The shift highlights the challenge and expectations the Cupertino, Calif., company faces with its iPhone 5. Unveiled on Wednesday, the iPhone 5 features a larger screen than its predecessor, an updated operating system and improvements that include upgraded mapping capability. Apple new software will feature an enhanced Siri virtual assistant service that will speak Mandarin.
The phone will be released Sept. 21 in the U.S. and other markets, such as Hong Kong and Japan. New Apple products commonly appear in China months after their U.S. release.

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Although the iPhone 5 was a popular topic on Sina Corp.'s Twitter-like Weibo microblogging service on Wednesday, many Chinese Internet users appeared lukewarm. Pan Shiyi, a widely followed real-estate mogul, posted a graphic comparing the specs of the iPhone 4S and the iPhone 5 with the comment, "Jobs is gone, Apple's innovation has come to an end," referring to late Apple founder Steve Jobs.
Internet users reposted the comment more than 25,000 times, debating the statement. A user writing under the name Xiao Xian Dou called Mr. Pan's perspective "pessimistic." The iPhone 5 "is very eye-catching, regardless of whether you're attracted to it—at least I am."
Apple's previous version, the iPhone 4S, initially was a hit in China. Its release in the country in January prompted pushing and shoving outside an Apple store in Beijing among would-be buyers.
But some customers in China grumbled that the phone wasn't all that different from the previous iPhone 4. When Apple reported disappointing earnings for its fiscal third quarter, which ended in June, the company partly blamed a big China iPhone inventory that contributed to a $2.2 billion drop in sales between the second quarter and the third. Analysts said anticipation for the iPhone 5 was a factor in the slackening demand as well.

What's the likely impact of the iPhone 5 on Apple's bottom line and its soaring stock price? Sterne Agee technology analyst Shaw Wu discusses on The News Hub. Photo: Getty Images.

Even if it concedes market share at the top of the phone market, Apple likely will continue to reap significant earnings from China. Analysys International predicts smartphone sales will reach 130 million this year and 165 million next year, up from 81 million in 2011, leaving competitors plenty of room for growth. The iPhone generally carries a retail price above 4,000 yuan in China, more than most rivals, giving it a significant profit margin.

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Phil Schiller, senior vice president of world-wide product marketing for Apple, introduced the new iPhone 5 Wednesday in San Francisco.

The Chinese smartphone market differs from the U.S. Phones in China aren't subsidized by telecom carriers to the same degree as they are in the U.S., and consumers are often willing to pay $500 or more for the privilege of having the latest device.
Many in the business believe the iPhone will bounce back. Wang Kai, who owns an Apple retail booth in an electronics mall in Beijing's Chaoyang financial district, said the sheer number of customers who pass by his shop to ask when the new iPhone will come out reassures him.
Still, the market has changed, he said. "Competition now is much harder, in my view," he said. "The iPhone 5 won't be quite the national treasure it once was."