China is well-known for its theft of intellectual property and products which are not readily available in its markets. Microsoft (MSFT) has had to deal with the piracy of Windows for years which is estimated to cost the company hundreds of millions of dollars a year. The movie industry has similar problems and the Chinese government has not effectively addressed them.
The Apple (AAPL) iPad has started to show up in China although it is not officially sold there.The appearance of the iPad is not unlike what happened to the iPhone when it was first introduced in global markets. A number of iPhone clones appeared in the People’s Republic, but so did real iPhones which were smuggled into the country and sold for unusually high sums. The smartphones were modified to work on China’s wireless networks.
Apple and its service partner China Unicom (NYSE: CHU) have not done well selling the iPhone, perhaps because it is available through other channels in China.
According to Bloomberg, one merchant its questioned “plans to sell the low-end version of the iPad for 4,300 yuan ($634) each after buying them in Hong Kong for HK$3,888 ($500).” It is a nifty profit even though it is based on an illegal act.
Apple has been slow to move into China, perhaps with good reason. It has great success in selling its products in most markets. In these countries, piracy may be a problem, but it is not an epidemic. Apple could, however, be letting caution keep it out of what is probably the largest consumer electronics market in the world. It is certainly the largest market for cellphones. Over 700 million people in China own a handset and in many cases portable phones are used in the place of more expensive computers.
Apple may stay out of China indefinitely. Its recent earnings show that China is not critical to its earnings. And, it should have learned a lesson about the People’s Republic. It is the most dangerous large market in the world for US goods and services.
Douglas A. McIntyre