The iPhone: Maker (and breaker) of New Business in China

BEIJING – MAY 2009: With over 18 million iPhones sold in more than 80 countries worldwide, the iPhone has yet to be formally released in mainland China. Despite this, the iPhone is a highly sought after and prized commodity in the Middle Kingdom, with a million iPhones in circulation and thousands more introduced into the domestic market on a weekly basis.

Apple’s tight control over international distribution channels and corresponding scarcity of the iPhone in markets where it has not been formally released has somewhat ironically been the main driving force behind its popularity in China. This scarcity, combined with the iPhone’s status symbol appeal in China has resulted in consumers being willing to spend a much larger proportion of their income on purchasing the iPhone. The iPhone has commanded up to 5000RMB, or $730US on the black market in Beijing. Taking GDP per capita into consideration, this would be the equivalent of paying $5700US for an iPhone in the United States.

In Zhongguancun, often referred to as the Silicon Valley of Beijing, the iPhone has spawned countless fledgling businesses and enterprises geared solely towards satisfying the insatiable demand of the urban populace for the iPhone. Local iPhone suppliers have had to be creative and fleet of foot in order to stay afloat with windows of opportunities for channels of supply usually being very short lived.

Since its release in mid 2007, the iPhone has been smuggled into China from Hong Kong, through mail order from the United States using US residential addresses, or direct from New Zealand, where for a limited time iPhones were available in unlimited quantities (subject to availability).

As these channels have been exploited and supplies have run out or curtailed by Apple, businesses would often collapse only to rise from the ashes upon the discovery of fresh, untapped (and uncontrolled) sources.

Successfully sourcing and “importing” the iPhone into China is however only the first hurdle aspiring business owners hoping to jump on the iPhone bandwagon have had to surpass. iPhones sourced internationally more often than not need to be unlocked in order to be used on the local networks.

Chinese resourcefulness has really come into its own in this regard with specifically designed SIM card “jackets” that enable the iPhone to be used in China. Far from perfect, these one-stop solutions are often flawed causing the iPhone to freeze or stop functioning as it should. New releases of the iPhone with improved security controls have required further creativity and development on this front.

Apple is said to be in negotiations with China Unicom and China Mobile for distribution deals, with a formal release date anticipated before the end of the year. China Unicom appears to be the leading contender as its WCDMA network would require minimal modification to the iPhone. With less than half the number of subscribers compared to China Mobile, it is unlikely that China Unicom will be able to successfully negotiate a sole distribution arrangement.

Authorities have turned a blind eye to the local iPhone business to date, however it is likely that a formalized agreement between Apple and a large established Chinese company would have significant legal implications for local suppliers choosing to continue in this business.

Regardless of the details of the inevitable distribution deal, the iPhone will be a huge success for Apple in China. The booming black market trade that has been built up around the iPhone will likely collapse as widespread availability would remove the scarcity factor, forcing local sellers to start looking for opportunities elsewhere.

- This is a guest post written by Bo Wang from iPhone app developer house Bokan Technologies (www.ibokan.com)