Impact Analysis In July, Apple announced lower than anticipated sales numbers for the iPhone in China. Many in the U.S. media blamed high prices, wondering when Apple would make their signature device more affordable there. This assumption implies the average Chinese consumer cannot afford the iPhone and is purchasing a less expensive alternative. This is incorrect.

The theory is a fundamental, yet common misconception about China’s consumer market. In his April article in Businessweek, Shaun Rein accurately describes this core misunderstanding when he says “there is no middle in China’s middle class.”

Many firms entering the Chinese market for the first time fall into a trap: they focus their research efforts on defining the middle class and its disposable income. They use the derived data to create statistical models, which incorrectly presume the Chinese middle class behaves similarly to the U.S. middle class, and apply it to pricing decisions. Subsequently, brands new to China typically position themselves as a lower cost and higher quality alternative to premium or luxury brands already available. This type of brand positioning is flawed.

In a previous Impact Analysis article, I discussed the necessity for foreign brands to localize their product offerings in China, and in turn, discover the expectations and perceptions each potential customer has regarding the brand and products. Without this background knowledge, companies often incur considerable expense in coming to grips with the fact that Chinese middle class consumers aren’t interested in items that are a “great deal for the price.”

Unlike many developing markets, Chinese middle class consumers are willing to spend more to satisfy core cultural and personal motivations. When money is an issue, they usually don't provide a price point in search of a bargain; they locate and purchase the cheapest, yet safest product available. A good analogy is a U.S. family living in a well-respected school district, with a half million-dollar house, shopping at local flea markets.

When price is no longer an issue, Chinese consumers seek to satisfy one of three cultural and personal consumption motivations: face, personal choice or highest quality. If your product does not provide a solution for these, a “bargain” price will not close the sale.

The iPhone in China demonstrates how all three motivations are satisfied by one product. By purchasing the most famous brand of smartphone, the Chinese consumer portrays an appearance of success and typically receives respect from those deemed important to impress. The same purchase may also satisfy a technophile’s need for the most up-to-date gadget. In addition, according to JD Powers, the iPhone is the highest rated smartphone in overall satisfaction. In this one product, Apple has seemingly satisfied the demands of potential consumers and positioned itself as the premium brand and market leader in China.

So why are iPhone sales in China lower than expectations?

No one can say for sure. But what is clear is this: the Chinese middle class is not replacing the iPhone by purchasing a less expensive competitor. They likely are substituting it with a phone of equal or even higher price. Thus, if money truly were the issue, a “dumb” phone or a first-rate knock off would be the alternative — not a middle tier product. Apple's iPhone is not losing market share because of price. Ironically, the only way price would contribute to slowing sales numbers in China is for Apple to follow the pundit's advise and reduce prices.

 This article appeared in Impact Analysis, December 2012.

Shawn Mahoney
About The Author Shawn Mahoney [Full Bio]
Shawn Mahoney is the Managing Director of EP Consulting Group and Board President of EMC2 the World. Fluent in Mandarin Chinese, Shawn is focused on China business consulting, China trade compliance and global competence development and training.

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