How Long Can Apple Sustain Its Torrid Growth in China?

There are near-riots when new products go on sale, a thriving counterfeit market and even reports of a teenager selling a kidney to buy an iPhone and iPad.

Apple store in China

Apple store in China

–> Despite Apple‘s huge popularity in China, the brand isn’t a major advertiser there, unlike in the U.S., where Siri spots and iPad billboards are ubiquitous. The simple explanation is that Apple has hit the sweet spot among urban Chinese who see its products — especially the iPhone — as the must-have badge of cosmopolitan cachet and upward mobility.

That means record revenue for Apple from Greater China — $7.9 billion in the first quarter of 2012, triple the amount a year ago.

CEO Tim Cook declared: “It is mind-boggling that we can do this well.”

However, lack of brand loyalty could make it tough for Apple to maintain that momentum in China.

“What is different from China and the United States is you don’t have the same group of core Apple fanatics here who’ve been using the products for 20-odd years and … swear by Apple and convert their whole families,” said David Wolf, president-CEO of Wolf Group Asia, a Beijing-based marketing strategy and analysis firm. “You have people saying Apple is wonderful and great, but they are the same people who said “Ericsson is great’ in 2000 and “Nokia is great’ five years ago.”

Apple spends more than half its global ad budget in the U.S. — $319 million out of $592.3 million in 2010, when only $27.7 million was spent in all of Asia, according to Ad Age’s DataCenter. While the personal voice-assistant is big in U.S. ads, Siri doesn’t speak Chinese and is a relative stranger to Apple’s No. 2 market. Instead, TV spots play up the functionality of the iPhone camera, iCloud and different apps. Outdoor ads in high-end shopping areas in China do feature product shots much like those in the U.S.

“China has an enormous number of people moving into the higher-income groups — middle class, if you will,” Mr. Cook said on the company’s latest earnings call in April. “And this is creating a demand for goods,” he said. “There’s a tremendous opportunity for companies that understand China, and we’re doing everything we can to understand it and serve the market.”

Apple has stumbled in China. This is the market where Apple abruptly postponed sales of the iPhone 4S from its retail stores the morning of its debut, citing safety concerns after tense crowds amassed outside overnight. Its Beijing store was pelted with eggs in response; this took place months after a fight between customers and staff shattered one of the store’s glass walls.

State media reported in April that a high-school student in central China sold one of his kidneys for $3,500, then used the money to buy an iPhone and iPad. And there’s the famous fake Apple store in western China’s Yunnan province (one of many), so like the real thing that employees genuinely thought they were working for the Cupertino, Calif.-based company.

Apple declined to comment for this story, as did its ad agency, TBWA Media Arts Lab.

Initially, the allure of Apple products stemmed from the fact that they simply weren’t available in China. Only people who traveled overseas or to Hong Kong could buy them. “The fact that it was hard to buy them here really boosted the cachet it had and cemented its status,” said Ben Cavender, associate principal at the China Market Research Group.

Now that iPhones and iPads are available, Apple has had success getting key opinion leaders and celebrities to use its devices, Mr. Wolf said. “In China, word-of-mouth, what your friends buy, what the people you admire buy and use, that’s so important,” he added. “They’re going to have to build that.”

Apple also faces the challenge of drawing Chinese consumers into its software ecosystem. Where apps drove demand for iPhones in the U.S., Chinese are less interested that there’s an “app for that.” Apple’s China iTunes store did not start accepting payment in the local currency until November 2011. But the bigger problem is getting people to pay for things that they’re accustomed to getting for free in a place where piracy is rampant.

Still, the market seems to be moving in the right direction. In 2011, app downloads in China nearly tripled and revenue from apps nearly doubled, according to App Annie, an apps-store analytics and data company. Games such as “Angry Birds” and “Fruit Ninja” are hugely popular, though the average revenue per download in China was 4¢ , compared with 22 cents in the U.S.

For now, Apple appeals to Chinese consumers whose fancy cellphones are part of the public profile of successful white-collar Chinese, along with an apartment and car. An Apple product says “that person is on a journey to arrival. That person is a new-generation, modern success,” said Tom Doctoroff, JWT’s‘s area director for Northeast Asia and Greater China CEO.

“It’s as much a fashion statement as it is anything else,” said Duncan Clark, chairman of BDA China, a Beijing investment advisory firm focused on tech. “I’ve actually seen women dragging their partners into the Apple store here. It’s gotten to the level of, “If you love me, get me an iPhone.'”

Apple’s premium retail experience, where consumers can play with the sleek gadgets out in public, is part of the allure. Apple stands out in a market where buying consumer electronics generally meant braving chaotic multistory malls crammed with tiny booths and aggressive shopkeepers hawking products that may or may not be legitimate.

“They’ve done a great job working on point-of-sale, which is really, really important in China,” said Mr. Cavender.

China’s five Apple stores—one for every 268 million Chinese—boast the highest traffic and revenue in the world for the company.

Most of the customers crowded around the blond wood tables in Apple’s stores in China appear to be professionals and students, though there are a few grandparents and young children. Chipper sales associates are on hand to answer questions.

Among the few uniquely Chinese aspects are the cash-counting machines on every other table. Despite the growing popularity of credit cards, China remains a cash-based society. The highest denomination bill is 100 yuan (about $15.80) and an iPhone 4S starts at 4,988 yuan (about $790) in China—necessitating a rather fat stack of cash.

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