Why Apple Is the Only Domestic Tech Giant That Can Succeed In China

Surely by now you've heard that Apple (NASDAQ: AAPL  ) is having a grand old time in China. The Mac maker is now up to $26.6 billion in trailing-12-month sales in the "Greater China" region, a 31-fold increase from all of fiscal 2009. That's incredible success over the span of just four years, but there's another notable absence here.

No other domestic tech giant has ever been able to put up that kind of growth in the Middle Kingdom. Why is Apple the only one that can succeed in China?

Microsoft: Piracy
Chinese consumers have a very low propensity to pay for intellectual property, including software. That's evidenced by incredibly high piracy rates for software; bootleg copies of content are readily available everywhere. There's even rampant piracy in the enterprise. That has made the it incredibly difficult for Microsoft (NASDAQ: MSFT  ) to penetrate the country, since it's a software company.

A Business Software Alliance report from May 2012 pegged software piracy rates in China at a whopping 77%. For example, an illegal copy of Microsoft Office can be had for just $2, significantly less than a legitimate version that costs $64. As high as that 77% figure is, that's actually an improvement.

When former Chinese president Hu Jintao visited the U.S. in January 2011, Steve Ballmer grilled him on intellectual property issues in China while saying that 90% of Microsoft users in China use pirated versions. Selling software in China is a tough proposition considering how Chinese consumers feel about actually paying for it.

Microsoft's Surface tablet is a different story, though, as a device with integrated hardware and software. The software giant began selling Surface tablets in China in October. However, Surface isn't yet a meaningful business relative to Microsoft's core software offerings. China also has a ban on video game consoles, so there's no hope for its Xbox 360.

For now, there's no way for Microsoft to see monster growth in China.

Google: Censorship
As one of the biggest proponents of an open Internet, Google (NASDAQ: GOOGL  ) was always bound to butt heads with the Chinese government over censorship issues. The search giant famously pulled out of China in early 2010 over censorship, redirecting users to its Hong Kong site where it was free to display uncensored results. That was an opportunity for Baidu (NASDAQ: BIDU  ) to continue growing its share as the "Google of China."

China is a hard market to ignore, though, with a swelling population of netizens. Two years later, Google said it was pushing back into the Middle Kingdom. The company then added a warning when results may be censored, which was just recently removed last month since it was proving more trouble than it's worth.

Even though Android is the dominant mobile platform, grabbing over 90% market share in China, that ubiquity is not doing Google any favors. Since Android is open-source, OEMs are free to grab the source code and modify it as they please, and what pleases them is removing all of Google's ad-supported apps and services in favor of more popular local alternatives like Baidu. That's why Baidu is the default search engine on 80% of Chinese Android phones.

Android benefits Baidu more than it helps Google.

Facebook: Great Firewall
China's Great Firewall also blocks access to the largest social network on the planet, Facebook (NASDAQ: FB  ) . The company has cited "substantial legal and regulatory complexities" that have prevented it from entering China so far. Third-party estimates pegged Facebook users in China at 63.5 million, using a VPN service to scale the Great Firewall. However, those figures seem a little optimistic.

China is among several authoritarian governments that block access to Facebook in whole or in part, with others being Iran, North Korea, and Syria. Much like Google, that's been an opening for local companies like Renren, which is now up to 48 million monthly active users.

Apple: Think Different
Since Apple primarily sells hardware with integrated software at premium prices, it has become a luxury status symbol that can't be easily replicated. There are counterfeit iPhone ripoffs, but when it comes to hardware, nothing can beat the real thing. Its gadgets are among other popular luxury brands in the country, like Coach.

On the other hand, since Chinese consumers don't buy as much content for the aforementioned reasons, that also reduces switching costs should consumer trends ever change. That makes Apple more vulnerable since its platform is less sticky in China than it is in developed markets where users load up on content.

For now, Apple will enjoy its role as the one and only domestic tech giant that can succeed in China.

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Comments from our Foolish Readers

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  • Report this Comment On January 31, 2013, at 8:31 PM, VyavharikNivesh wrote:

    Great Article and Analysis ! Very insightful

  • Report this Comment On January 31, 2013, at 9:44 PM, Gstenstrom wrote:

    How is Samsung doing there???

  • Report this Comment On February 01, 2013, at 9:52 PM, dsciola wrote:

    Dont get part where you argue Chinese consumers are less inclined to want content. Im guessing u mean less inclined in the sense of paying for it vs pirating it, but doesnt that nonetheless mean they want content rich devices/access to content?

    Could that then mean that more successful software operators and better OS's LT will grow more value?

    Plz explain, thx

    Dom

  • Report this Comment On February 01, 2013, at 10:34 PM, i4fatpitch wrote:

    It will be interesting to see how the Chinese smartphone market develops. Apple is not the only game in town.

    Regarding MSFT, I agree with the assessment. Piracy has been a huge problem. MS is moving away from software on the good old fashioned DVD and toward software on the cloud. They are now offering a home version of Office 365, which gets you 1 year subscription to the office suite for $100. I am guessing DVDs will be around for another few years but the trend is clear.

  • Report this Comment On February 02, 2013, at 6:54 AM, mky517 wrote:

    What would be the most compelling reason for a piracy prone consumer in China to pay premium prices for Apple ? For how long ?

  • Report this Comment On February 02, 2013, at 7:41 AM, celem wrote:

    I find it hard to accept that Apple has dominating future in China. Apple's smartphones severely lag that of Android phones precisely because of " low propensity to pay for intellectual property" - Android's OS is free, Apples is not. According to Strategy Analytics "Android accounted for a record 86 percent share of all smartphones shipped in China this past quarter while Apple iOS followed with 12 percent share." See http://tinyurl.com/ay5kd4m

    Apple may see growth in China's desktop market but then the desktop, in general, is shrinking. Additionally, China's desktop market has other competitors besides Microsoft. Linux is a worthy competitor, especially China developed versions, such as the "Deepin" version (http://www.linuxdeepin.com/joinus)

    Go to (statcounter) http://gs.statcounter.com/#browser_version-CN-monthly-201201... and notice that Apple's Safari browser is almost non-existent and not growing and Microsoft's IE, while dominant, is on the decline. The only browser that is growing is Chrome and "other". Browser versions in use are a good clue of the OS market share.

    Personally, I will not look to China for Apple growth.

  • Report this Comment On February 02, 2013, at 12:03 PM, dwilh51183 wrote:

    AAPL growth in China and JAPAN and RUSSIA will be huge for the next 5 years. I think TIM COOK is tired of having people say he is a pathetic CEO who could care less about shareholders. Before long, AAPL will release a few LOW- COST QUALITY PHONES FOR UNDER DEVELOPED NATIONS , AND AAPL will reveal the great I-TV, along with increasing their dividend and another share buyback.The Iphone 6 will be in my hands as soon as my contract runs out in May. AAPL needs to change their stupid policy of ...NOT USING OTHER PEOPLE'S IDEAS AND PATENTS TO DEVELOP BETTER PRODUCTS, AND PAY THEM A FAIR BUY-OUT PRICE.After all , AAPL did pay 21 million dollars for that stupid SWISS CLOCK LOGO

  • Report this Comment On February 02, 2013, at 12:09 PM, dwilh51183 wrote:

    Also wanted to say there was nothing wrong with AAPL'S LATEST QUARTER ! They sold 54 1/2 $$ billion worth of products, which is quite amazing. HAS ANY OTHER AMERICAN COMPANY COME CLOSE TO THIS? Why is AAPL the only company in the UNIVERSE that analysts keep expecting the company to increase sales by 50% every quarter? AAPL IS A MONSTER! A QUALITY COMPANY, AND A STOCK THAT IS TOTALLY ON SALE AND WAY TOO CHEAP FOR THE KIND OF $$$$ THEY MAKE

  • Report this Comment On February 02, 2013, at 12:22 PM, Mega wrote:

    Intel.

  • Report this Comment On February 02, 2013, at 7:52 PM, dsciola wrote:

    Celem,

    Think you offered a good counter-argument to China and AAPL growth. Allow me to pry further into your 3 points...

    Dunno if Android is entirely 'free' so to speak. I am not at all a tech geek, yet a few articles I came across seemed to indicate it is not...

    http://www.guardian.co.uk/technology/2011/sep/19/android-fre...

    http://tech.blorge.com/Structure:%20/2010/05/03/why-googles-...

    If Android is indeed not really 'free', dont see its advantage there.

    Do u know what China's OS market share figures are in terms of dollars? I admit I cant find #'s for this, but I'de imagine AAPL has a considerable higher amount than 12% in terms of $ vs in terms of units. I know in the US, there definitely are more phones running Android, but AAPL still commands a vastly higher proportion of profits.

    As for browser, not sure about that either. Safari hasnt been a tremendously popular internet browser in the states, seems most ppl run Firefox, yet Android and iOS dominate mobile OS mrkt share here. Dunno if the dynamics though are different in China

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