* Read this story in a PDF:
* Apple's sharp drop in China revenue puzzling
* Plans to double retail outlets in China by 2015
* Samsung leads high and low ends of smartphone market
* Samsung's core strategy is building relationships -
* Samsung has larger retail presence in China
By Melanie Lee and Miyoung Kim
GUANGZHOU, China/SEOUL, July 26 Apple Chief
Executive Tim Cook believes that "over the arc of time" China is
a huge opportunity for his pathbreaking company. But time looks
to be on the side of rival Samsung Electronics Co Ltd
, which has been around far longer and penetrated
much deeper into the world's most populous country.
Apple Inc this week said its revenue in Greater
China, which also includes Hong Kong and Taiwan, slumped 43
percent to $4.65 billion from the previous quarter. That was
also 14 percent lower from the year-ago quarter. Sales were
weighed down by a sharp drop in revenues from Hong Kong. "It's
not totally clear why that occurred," Cook said on a conference
call with analysts.
Neither is it totally clear what Apple's strategy is to deal
with Samsung - not to mention a host of smaller, nimbler Chinese
Today, in the war for what both sides acknowledge is the
21st century's most important market, Samsung is whipping its
American rival. The South Korean giant now has a 19 percent
share of the $80 billion smartphone market in China, a market
expected to surge to $117 billion by 2017, according to
International Data Corp (IDC). That's 10 percentage points ahead
of Apple, which has fallen to 5th in terms of China market
Cook said Apple planned to double the number of its retail
stores over the next two years - it currently has 8 flagship
stores in China and 3 in Hong Kong. But, he added, Apple will
invest in distribution "very cautiously because we want to do it
with great quality."
Samsung, with a longer history in China, now has three times
the number of retail stores as Apple, and has been more
aggressive in courting consumers and creating partnerships with
phone operators. It also appears to be in better position, over
an arc of time, to fend off the growing assault of homegrown
competitors such as Lenovo Group Ltd, Huawei
Technologies Co Ltd and ZTE Corp, former
company executives, analysts and industry sources say.
Apple declined requests for comment for this article.
Samsung's history and corporate culture could hardly be more
different than Apple's, the iconic Silicon Valley start-up
founded by Steve Jobs and Steve Wozniak in 1976. Lee Byung-Chull
started Samsung in 1938 as a noodle and sugar maker. It grew
over the decades into an industrial powerhouse, or chaebol as
Koreans call the family owned conglomerates that dominate the
nation's economy and are run with military-like discipline.
Apple, by contrast, became the epitome of Californian cool,
an image the company revels in. That hip image translates in
China - its stores are routinely packed - but hasn't been enough
to overcome the more entrenched Samsung.
A stuffy electronics bazaar in the southern Chinese city of
Shenzhen illustrates part of the reason why.
Samsung Galaxys and Apple iPhones of different generations
sit side by side, glinting under bright display lights as
vendors call out to get customers' attention. With its varied
models, Samsung smartphones outnumber iPhones at least four to
While Apple releases only one smartphone a year, priced at
the premium end of the market, Samsung brings out multiple
models annually with different specifications and at different
price points in China.
And those models, analysts say, are loaded with features
tailored specifically for the local market: apps such POCO.cn,
the most popular photo sharing site in China, or the two slots
for SIM cards (Apple offers one), which allows service from
multiple cell carriers, either at home or abroad.
"The Chinese just love features. They want their phone to
have 50 different things that they're never going to use," said
Michael Clendenin, managing director of technology consultancy
RedTech Advisors. "Apple just doesn't play that game.
Unfortunately, if you want to hit the mainstream market in
China, and you want a lot of market share percentage points, you
have to offer the Swiss army knife of cellphones."
"SETTING THE PACE"
Analysts believe Samsung's increasing strength in China is a
critical reason behind its rival's possible intention to
introduce globally a new and cheaper iPhone model, as well as
one with bigger screens - a staple of Samsung's offerings.
Said a Samsung executive with experience in China: "We
definitely think we're setting the pace there. They are having
to respond to us."
Most audaciously, Samsung has gone after Apple not simply by
offering lower priced smartphones, but by attacking its rival
directly in the pricier end of the market. "We put a lot of
emphasis on the high end market in China," co-CEO J.K. Shin told
Reuters in an interview.
Samsung launched a China-only luxury smartphone together
with China Telecom marketed by actor Jackie Chan that
retails for about 12,000 yuan ($2,000). The flip phone, named
"heart to the world," is encased in a slim black and rose gold
metal body. The sleek look - called "da qi" (elegantly grand) -
is coveted by Chinese when they shop for cars, sofas or phones.
"There are a lot of 'VVIP's' in China, and for them we
launched luxury phones promoted by Jackie Chan. This helps
target niche customers and build brand equity," said Lee
Young-hee, executive vice president of Samsung's mobile
While Samsung won't sell millions of these smartphones, the
creation of the phone in conjunction with a carrier reinforces
Samsung's willingness to go local - and tap into niche markets.
"The key point is that Samsung consistently adapts to the
local market," said TZ Wong, a Singapore-based technology
analyst with IDC.
Apple's latest mobile operating system offers links to
popular Chinese applications like Sina's microblogging
platform Weibo, but the application itself must be downloaded
onto the phone. On all of Samsung's entries, it's already there.
"People know intellectually that Samsung is from Korea, but
when it comes to the messaging there is always a local face,"
Samsung opened its first office in China in 1985 in Beijing
- an era in which it was all but inconceivable that Apple and
Samsung would end up in one of the world's most intense
corporate grudge matches. Like other South Korean chaebols,
Samsung was a first mover in China, using the market primarily
as a base to produce electronics for the world.
In contrast, Apple's big push in China came only recently,
with the advent of the smartphone age roughly five years ago.
The early entry gave Samsung an undeniable edge, and it
adapted fast to a rapidly changing environment. By the
mid-1990s, with the economy booming, Samsung made the strategic
decision to treat the Chinese market not just as a production
base, but to start marketing to China higher-priced electronics,
said Nomura researcher Choi Chang-hee, who wrote a history of
Samsung's experience in China.
That shift has meant Samsung's retail presence in China far
outstrips Apple's. Aside from selling via the distribution
outlets of the three major telecom carriers, Samsung also has a
strong retail presence through its partners Gome Electrical
Appliances and Suning Commerce Group, as
well as its own "Experience" stores and small retailers all over
Apple works through the same channels, but its relatively
late entry means it has a significantly smaller presence.
Samsung, for example, has more than 200 official distributors
and resellers in Guangzhou province, while Apple lists 95.
Over the last two decades, Samsung has also taken pains to
build relationships with Chinese government officials and
-perhaps more critically - the three major telecom carriers.
The notion of the importance of connections - or "guanxi" -
in China is occasionally overrated in business. Not, according
to Samsung's Shin, in this case. "It's our core policy to keep
friendly relationships with the operators," he said. In China,
each carrier uses a different technology and that requires
Samsung "to tweak our smartphones to their request."
"It's not easy," Shin said, "but we do this to be more
Contrast that with the ongoing negotiations Apple has had
with China Mobile, the largest cellphone operator. For
years the two sides have been unable to come to an agreement on
revenue sharing, effectively precluding Apple from hundreds of
millions of potential customers.
SCRUTINY FROM THE TOP
Samsung's reach extends higher than just the CEOs of the top
state-owned telecom companies. Top executives have met each of
the last several Chinese leaders, most recently Xi Jinping, who
spent time in April with vice chairman Jay Y. Lee, son of K.H.
Lee, Samsung Electronics chairman.
"What surprised me most," said Lee later, "was that they
(Chinese leadership) know very well about Samsung. They even
have a group studying us."
The Chinese government has also made clear it's well aware
of Apple - though not always in a good way. In April, state
media bashed Apple for its "arrogance," protesting among other
things that its current 1-year service warranty was
insufficient. Apple initially dismissed those criticisms, but
Cook later apologized to Chinese consumers.
Samsung's success in China has it roots, one former
executive said, in a previous obsession for the company: its
desire not to replicate the mistakes made by Japanese rivals.
"Samsung spent a lot of time benchmarking Sony,
Toshiba and Panasonic," said Mark Newman, who
spent six years in Samsung's global strategy group and is now an
industry analyst at Sanford C. Bernstein in Hong Kong.
"One of the things that came out of that is the realization
that the insular approach has its drawbacks, and so Samsung has
made an effort over the last 10 years to be much more global."
This strategy of decentralization is plainly evident in
China, he said, home now to more Samsung employees than any
country outside South Korea.
FIGHTING HIGH AND LOW
Samsung now leads in both low-end and high-end segments in
China, according to IDC, and its logic of going after both ends
of the market is straightforward. In China, where the average
wage is roughly $640 per month, many users looking to upgrade
from feature phones to smartphones cannot afford Apple.
By bracketing the market with multiple models, Samsung can
breed deep relationships with customers, many of whom, market
research shows, trade up to more expensive models as they get
older. Playing high and low also positions Samsung to fend off
the intensifying competition from Chinese firms such as Lenovo
and Huawei and literally hundreds of smaller local players.
"That's where the next battle for Samsung will be fought,"
said Newman. "We'll have to see if Apple does introduce a new,
cheaper model for China - and the world."