Apple Trailing Target in China Stores May Be Android Opening

Apple Inc. (AAPL) is opening stores in the China region at a quarter the pace it forecast 19 months ago, giving rival makers of smartphones and tablet computers time to gain users in the world’s biggest mobile-phone market.

Apple opened its third store in Shanghai today and will open its first one in Hong Kong tomorrow, bringing the total to six in a region with the company’s highest-grossing outlets. That compares with the 25 stores that Ron Johnson, then Apple’s head of retail, said last year it targeted by February 2012.

The iPhone maker is only “scratching the surface” of Chinese demand after sales in the region surged six-fold to $3.8 billion last quarter, Apple Chief Executive Officer Tim Cook said in July. Still, delays in store openings may give makers of smartphones and tablets equipped with Google Inc. (GOOG)’s Android software room to gain market share, said Shaun Rein, managing director of China Market Research Group.

“In many ways they are still behind the curve, and they are opening stores too slowly,” said Rein, whose Shanghai-based company advises retailers and other clients about operating businesses in China. “Before, Apple had clear dominance in terms of technology, but now the gap is being lowered because of Android.”

Apple is expanding distribution of its products including the iPhone and iPad in China as competition with Android device makers including Samsung Electronics Co. and Lenovo Group Ltd. (992) intensifies. Kristin Huguet, a spokeswoman at Apple, declined to give the company’s latest target for store openings in China.

Leaving for Penney

The company, the world’s biggest by market value, accounted for 13 percent of China’s smartphone market by shipments in the second quarter, third behind Nokia Oyj (NOK1V)’s 36 percent and Samsung’s 15 percent, according to estimates at research firm Gartner Inc. Apple ranks first worldwide, according to researcher Strategy Analytics.

Apple aimed to have as many as 25 stores in the China region over two years, Johnson said Feb. 25, 2010, when the Cupertino, California-based company only had one store in the mainland. Johnson left in June to become J.C. Penney Co.’s chief executive officer.

“I don’t think anyone really expected them to come up with 25 stores in 24 months,” said David Wolf, CEO of Wolf Group Asia, a Beijing-based marketing strategy consulting firm. “Apple set a very high bar for themselves in a market where the logistical challenges are profound.”

‘Larger, Better’

China’s Jiefang Daily, citing Johnson, reported this February that the company may delay the 25-store target to focus on “larger and better” locations. Apple’s Huguet declined to confirm or deny the comments.

“They have been quite cautious so far,” said Sun Peilin, an analyst at research firm Analysys International in Beijing. “For Apple, they have now seen the benefits and potential of the market, and I think they will speed up the store openings.”

The new Shanghai store is the company’s biggest in China. The one in Hong Kong is located at the International Finance Center in the central business district.

“It’s a big store, and the design is quite good,” said Cui Lizhen, who traveled from his home province of Jilin and waited 40 hours outside the new outlet in Shanghai before the opening at 9:00 a.m. local time today.

In Hong Kong, about 10 people camped outside Apple’s store with their backpacks and folding chairs at 7:45 a.m. local time today, more than 25 hours before the opening tomorrow.

Retail Partners

A lack of stores hasn’t stopped growth. Shipments of the iPhone, Apple’s best-selling product, jumped to 2 million in China in the second quarter, compared with 300,000 a year earlier, according to Gartner analyst Sandy Shen. The figures include sales through unauthorized channels, or the so-called gray market, she said.

Having more stores would mean higher sales not only at the company’s own retail locations, Wolf said. The “halo” effect of the stores boosts the image of the products and lifts sales even at the resellers, he said.

Apple has more than 900 sales agents in mainland China, including stores operated by Studio A Inc., a unit of Taiwan’s Cheng Uei Precision Industry Co. That company’s chairman is Gou Tai-chiang, brother of billionaire Terry Gou, head of Apple supplier Foxconn Technology Group. In 2009, Apple started selling the iPhone through China Unicom (Hong Kong) Ltd., its carrier partner in China.

Apple’s distribution network in China has failed to keep up with demand, forcing customers to buy from vendors not sanctioned by the company. Only half of the 1.07 million Apple iPads sold in China in the second quarter were through authorized vendors, according to Analysys.

Apple may have scaled back the pace of store openings in China to focus on flagship locations, Wolf said.

“Location is important and iconic,” he said. “Apple’s performance is excellent, but not quite outstanding. I’d give them a strong B+.”

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.