In August of 2012, China was shocked by news that a teenager in the southern province of Hunan had sold one of his kidneys in order to raise funds to buy Apple Inc.’s AAPL, +0.87% iPhone.
And it didn’t stop there: A subsequent police investigation uncovered a gang of organ harvesters using the lure of expensive Apple handsets to talk young,tech-hungry victims into providing valuable body parts for sale on the black market.
Sensational stories such as those, as well as the long lines of customers that invariably form whenever Apple rolls out its latest product, suggest that China — the world’s largest market for smartphones — is mad for the iPhone.
And yet, the kidneys-for-iPhones scandal also illustrates a key reason why Apple’s Golden Age in China may be coming to an end: In a country where workers earn an average monthly salary of a little more than $600, China’s domestically made budget phones, which can cost less than one-third of the iPhone’s price, are increasingly eating Apple’s lunch.
In particular, the Chinese-made Xiaomi phone — the name of which means “little rice” — is displacing the U.S. electronics giant, with reviewers describing the Xiaomi offerings as similar to the iPhone, but at a much more competitive price.
As a result, the privately held, four-year-old start-up Beijing Xiaomi Technology Co. has stormed past its rivals — including Apple and previous market leader Samsung Electronics Co. 005930, -0.74% SSNLF, -2.54% — to become the No.1 smartphone maker in China, taking a 14% market share, according to a report last month by research group Canalys.
And this is a recent development: Xiaomi overtook Apple in May but was then still in third place behind Samsung and No. 2 Lenovo Group Ltd. 0992, +2.44% LNVGF, +0.63% , according to separate data from Counterpoint Technology Market Research.
Handsets for high society
Still, while the budget smartphone is now king in China — with handsets below 1,000 yuan ($162) already taking 35% of the market in 2013, according to a survey by mobile-app analytic provider Umeng — the iPhone seems to be holding the loyalty of wealthy consumers.
The same 2013 Umeng survey, released last March, showed that of the “high-end handsets” (those costing at least 3,000 yuan, or $486, each), about 80% were iPhones. On the other hand, that high-end segment as a whole was worth only 27% of the market last year.
Interestingly, the survey also showed that users of the cheaper “1,000-yuan handsets” mostly used their phones for entertainment, while those buying more expensive handsets had more diverse demands from their devices, including mobile Internet searches, personal finance and shopping.
Given this trend, it’s not surprising that in Hong Kong, one of the richest places in China, “iPhone Phever” would run unabated.
An employee at one of Hong Kong’s Apple Store locations told MarketWatch that she expects long lines of customers hoping to buy the new iPhone 6 on its first day on sale, “so long as nothing goes wrong before the launch day.”
She added that such line-ups for previous Apple launches had included both Hong Kong natives and visitors from the Chinese mainland.
And sure enough, China Mobile Ltd. 0941, +1.10% CHL, +0.60% , mainland China’s largest wireless carrier, has already started taking pre-orders for the iPhone 6 … or so it would seem: A promotion on the China Mobile website says the company is letting its customers place orders for a “brand-new, mysterious phone.” Taking some of the mystery out of it, an image previously appearing next to the promotional ad showed the Apple logo and the number six, though that picture has since been removed. All the same, the site showed 65,392 pre-orders as of Monday morning.
Subsidies drying up
But if Apple’s price point is its problem in the Chinese market, then the problem is about to grow, according to research from IG Group strategist Ryan Huang.
In the past, mainland China’s three big telecoms — China Mobile, China Telecom Corp. 0728, +2.78% CHA, -1.79%and China Unicom Ltd. 0762, -0.14% CHU, +1.01% — have offered generous subsidies for its customers who buy the iPhone.
But Huang reports that the trio are now under pressure from the central government, which owns a majority stake in each of the three, to cut their marketing expenses.
China Mobile said on its earnings call last month that it would cut 38%, or 13 billion yuan ($2.1 billion), from its handset subsidies this year, a move which could likely spark a jump in the price of high-end handsets like the iPhone.
China Telecom has since followed suit, announcing late last month that it would further reduce its own handset subsidies in the second half of this year, although it didn’t specify by how much.
“This will put higher-end brands such as Apple at a disadvantage, while giving Xiaomi further leverage,” Huang said, since previously, as at least 40% of smartphones shipped to China were estimated to be subsidized by the telecoms.
The future is calling … on a Xiaomi
Beyond the price issue, demographics also seem to favor Xiaomi and similarly low-priced Chinese phones — at least the way it looks right now.
A July survey by analytics provider Flurry found that Xiaomi devices in particular are very popular among China’s younger consumers (aged 13-34), especially college students and young adults who have just entered the workforce.
In the age groups of 18-24 and 25-34, Xiaomi users are 20% more numerous than in the older groups.
Xiaomi is also the popular choice for young Chinese business professionals, which “is a fast-growing segment in China and a main driver behind China’s new consumer-driven economy,” Flurry said.
But will those same groups migrate back to the iPhone in the months and years ahead?
“It’ll need more differentiating features,” IG Group’s Huang said. “What might spur some interest is how much integration it [the new iPhone] will have with its upcoming line of wearables, which will pull users further into the ecosystem.”