3 Big Problems GoPro Could Face in China

GoPro (GPRO -3.39%) plans to expand into China, according to a recent report from the Financial Times. Speaking to the Times at CES 2015, CEO Nick Woodman said that he believed that GoPro had "every opportunity to succeed in China." However, he also stated that GoPro wouldn't simply rush into this potentially huge market, and that he wanted his company to take its time and "introduce the brand properly."

Source: GoPro.

Entering the Chinese market could certainly diversify GoPro's top line away from its core U.S. market, but it could also be a tough market to succeed in. Let's take a look at the three core challenges which GoPro could face in China.

1. Knockoffs abound
The biggest problem for GoPro in China will be the sea of knockoffs which are widely available all over the country.

A quick search on Taobao, the country's largest e-commerce site, reveals colorful GoPro clones which cost as little as 300 RMB ($48). These devices certainly can't compete against GoPro's 4K-capable HERO 4 Silver ($399) and Black ($499) models, but they record 1080p video at 30 fps and 720p video at 60 fps, just like GoPro's entry level HERO, which costs $129.

A 300 RMB action cam on Taobao. Source: Taobao.com.

To make matters worse, Xiaomi -- the handset maker which toppled Samsung (NASDAQOTH: SSNLF) in China with low-priced phones -- is reportedly interested in expanding into action cameras. According to GizChina, Xiaomi's rumored camera could match the HERO 4 Black's specs (4K video at 30 fps, and 1080p video at 120 fps) for a mere 999 RMB ($161). Such a device, especially one for a company as well-established as Xiaomi, could punt GoPro out of China.

2. Apple and the status symbol game
On the bright side, those knockoffs indicate that Chinese consumers are interested in action cameras.

Knockoffs also won't necessarily hurt a premium brand, as long as affluent consumers insist on buying it over imitators. For example, there are plenty of fake iPhones in China, yet sales of real iPhones are still fueled by rich customers who eagerly claim them as status symbols.

While it might seem odd to call an action camera a status symbol, GoPro has become one in America for two reasons. First, owning one tells people that you can afford to spend $400 to $500 on a tiny camera. Second, the GoPro brand has become a lifestyle -- it's a way to show other people that you do interesting things on kayaks, motorcycles, or surfboards in your spare time. In other words, GoPro lets you take a "premium selfie" which shows off how active you are to your friends. To sustain that image, GoPro encourages its users to upload their content to its media network.

GoPro could accomplish the same thing in China, where members of a rising middle class are now participating in more outdoor activities during their free time. But to do so, it must properly market the GoPro with an iPhone-like snob appeal to break away from its imitators.

However, GoPro investors should recall that Apple was recently granted a patent for its own wearable action camera. The patent doesn't necessarily mean that Apple will launch its own action camera, but the news nonetheless sunk GoPro shares by 12% on Jan. 13. If Apple actually launches a GoPro competitor globally, it could lock GoPro out of the premium market and force it to compete against its cheaper competitors.  

3. Securing a joint venture
Many foreign companies enter China via joint ventures with Chinese partners. By doing so and manufacturing the products in China, foreign companies split their operating expenses, get localized sales teams, and avoid high import taxes which can raise prices to uncompetitive levels. The trade-off is that the profits must be split as well.

Since GoPro already sells its cameras at premium prices, it should probably sign a joint venture with a Chinese company to reduce manufacturing costs and retail prices. If GoPro simply exports cameras to China without a joint venture partner, the 17% value-added tax and additional expenses could make its cameras too expensive.

Foxconn, which already owns nearly 9% of GoPro, would be an obvious choice. The company already holds joint ventures with Hewlett-Packard, Nvidia, and other companies, and has a solid history of manufacturing products for Apple (AAPL 0.52%) and other tech giants. However, Foxconn CEO Terry Gou hasn't taken a seat at GoPro's board, and hasn't signed any strategic deals with the company. GoPro has signed manufacturing deals with smaller companies like Taiwan's Chicony Electronics, but it still needs a larger partner to help it enter the Chinese market.

The road ahead
There are many U.S. companies -- including Best Buy and Home Depot -- which flopped in China because they failed to adjust their U.S. strategies for the Chinese market.

It's encouraging that GoPro will look before it leaps into China, but it still needs to distinguish itself from the rest of the action camera market, build up its brand appeal, and secure local partners before it can hope to generate any sales from the world's largest electronics market. Lastly, GoPro must keep a close eye on Xiaomi and Apple, as action cameras from either competitor could derail its international growth plans in China and other markets.