China has a taste for Apple, but hurdles exist

HONG KONG -- Apple appears to have growing pains in China.

Apple mania has struck many parts of Asia, and nowhere is that more evident than when a new Apple store opens in the region here. Thousands flocked to the opening last month of Apple's first retail store in Hong Kong and its third store in Shanghai.

The cult-like reception that Apple stores receive — along with the fake stores that have popped up in China — are signs of Asia's zeal for the company's devices. Demand for Apple iPads and iPhones far outstrips supply here, spawning a gray market for gadgets brought here from the U.S.

"The stores themselves have become as iconic as the devices are," says Michael Clendenin, managing director of RedTech Advisors in Shanghai. "That's why you see the long lines at Apple."

Apple's quest for China isn't without challenges, though. Apple now has six stores in the greater China region, with more on the way.

How much Apple can grow in Asia may depend on affordability. China's gross national income per capita averaged $4,260 in 2010, but many rural households have less. This makes it difficult for many mainland consumers to afford an iPad or iPhone. Apple devices are significantly more expensive than those of its competitors. Fake Apple products that ape the real thing also pose a challenge.

"The question is whether Apple can come up with a solution that can sell at around $300," says Bonnie Chang, a senior analyst at Yuanta Research in Hong Kong. "They need something new to extract growth from consumers."

As Apple's domestic business matures, its international sales — particularly those in the greater China region — are becoming ever more important. In its fiscal third quarter, which ended in June, Apple recorded $3.8 billion in revenue in the greater China region, including Taiwan and Hong Kong, more than a sixfold increase from the year-ago period.

Apple's retail stores in China now bring in the most traffic and revenue of its global stores. The region represents an "incredible opportunity," and Apple is "just scratching the surface," CEO Tim Cook told analysts on an earnings call.

In mainland China, Apple is partnered with China Unicom to offer its iPhone, but has yet to strike a deal with China Mobile— the world's largest wireless carrier — to expand in the country. China Mobile boasts 600 million-plus subscribers, more than all U.S. carriers combined.

Apple has also had to jump through hoops to set up in China. Apple planned to have 25 stores in the greater China region by this year but missed its goal because it underestimated the time to launch there, says Sandy Shen, a Shanghai-based research director for Gartner.

Also, many lower-price rivals pose huge retail competition to Apple, as well. Nokia, Samsung, Motorola, HTC and Lenovo are well-positioned to appeal to Chinese consumers at tens of thousands of retailers with lower-cost devices, Shen says. That bodes well for Android-based rivals.

Still, Apple is widely expected to unveil an iPhone 5 Tuesday in the U.S., a move likely to turn the world's focus to the company once again.