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The Chinese Apple

, September 15, 2014, 0 Comments

the chinese apple-MarketExpress-inApple probably never thought it would face its stiffest challenge in China, the country from where it assembles iPhones, iPads and their accessories.

One of the myths about China that has largely exploded in recent years is its upstream proficiency in producing hi-tech exports. As the world’s largest producer of hi-tech exports, the Chinese industry had acquired the reputation of being broad-based and technologically balanced. Barbie dolls, stuffed toys, alarm clocks, leather shoe uppers and other consumer non-durables apart, it was taken to be equally proficient in producing finished electronic and computer hardware.

Research on supply chains has revealed China’s contribution to manufacturing hi-tech items to be essentially at the downstream processing end. Large chunks of semi-conductor and electronic intermediates imported from the neighbourhood are efficiently processed by disciplined cheap labour in numerous Chinese SMEs. These final products are recorded at the point of shipment as hi-tech items by the Chinese customs.

While the role of processing, as the major contributor to manufacturing of hi-tech items by China might have been unknown to many, global electronic brands were always aware of this particular characteristic of the Chinese economy. And they lost no chance of exploiting it to the hilt. The Apple is one of the biggest examples.

It is widely known that parts and components of Apple IPhones and IPads, along with their accessories, are sourced extensively from the region for final assembling in China. This low-value added operation supervised by the Apple’s electronic and design manufacturing Taiwanese contractor Foxconn (who also coordinates similar sourcing and assembling functions for Blackberry, Kindle and Playstation) has been a key determinant of Apple’s ability to supply large volumes. The role of China and its assembling skills in the Apple’s success, therefore, is undisputed.

From being a key player in the growth of Apple, China is now increasingly turning to being a major competitor. Nothing reflects this better than the startling growth of the Chinese smartphone manufacturer Xiaomi. It is hardly surprising that Xiaomi has already acquired giant-killing reputation by being labeled the ‘IPhone killer’ and ‘Apple of China’.

The Xiaomi’s business success is due to a couple of basics. Apple products don’t come cheap and target the high end of the market. In India, for example, the tax-inclusive retail prices of the latest range of iPhones would be at least USD600.

For a market where several other smartphones are available within the price band of USD225-300, the Apple’s pricing strategy is clearly aimed at driving home the exclusivity of its products, which come at high premiums.

These products have sold well in India as they have in all other parts of the world. But in markets like India and China, there is also an enormous demand for budget smartphones. This is from the segments where volumes are driven by value. IPhones never aimed for these segments; becoming ‘mass smartphones’ were never their intentions. Xiaomi’s expansion strategy is based on these segments and the ‘mass’ vision.

Most business analysts paid little attention to Xiaomi when it began expanding in China a few years ago. Offering the bulk of smartphone features through its sleek android handsets, Xiaomi gave the Samsung Galaxy smartphones as well as the Apple IPhones tough competition seizing significant low and middle-income market shares. In no time at all, it has grown to be the topmost smartphone vendor in the Chinese market and have begun shipping its phones to Taiwan and major Southeast Asian markets like Singapore, Malaysia and Thailand.

India is now a major focus for the manufacturer given the extensive depth of the Indian telecom market and the projected growth in number of smartphones sold. Its phones have already become heavily sought after with the latest offering of 40,000 Redmi 1S phones on Flipkart, priced at around USD100, getting booked in just over 4 seconds.

This matched its earlier sales performance a few weeks ago where 20,000 Mi3 phones were sold in a couple of seconds. With its plans to open a R&D facility in Bangalore for making phones incorporating design features specific to the Indian market, Xiaomi is keen on plugging India firmly in its supply chain; both in terms of contributing to production design, as well as a major market for final demand.

While IPhones are not going to obliterate from India, much as they have not from China, the advent of Xiaomi, coupled with the Google’s latest android one innovation, marks a new stage in the global smartphone space. From being upper-income luxury possessions, smartphones would now be more ‘middle class’ necessities aiming to become mass use devices. Xiaomi has taken the lead in ushering in this stage by utilizing the traditional strength of Chinese manufacturing – low cost assembling. The difference is this time around low cost assembled stuff from China are focusing more on its own market and the neighbourhood, rather than the West, where earlier they would travel to. The Chinese Apple is clearly focused on Asia.