What Apple is up against in two growing mobile markets: China and Brazil

19 Comments

Apple(s AAPL) sells tens of millions of iPhones every quarter, but its biggest challenge is expanding the reach of the iPhone in markets where smartphones are incredibly expensive and new to a lot of potential customers. At the Dive into Mobile conference on Monday in New York City, two companies represented onstage offered stark examples of how Apple’s model, which it has nearly perfected in established markets, may require some adaptation: China’s high-end handset maker Xiaomi and Brazil-based wireless carrier Movile.

Xiaomi is selling high-end smartphones in China and is doing that in a way that essentially takes Apple’s own playbook and adapts it for a more price-conscious buyer. The company sold 7.2 million smartphones in China last year and plans to sell double that this year.

Taking cues from Apple

China-flag-Apple-logoIts recipe for success will sound familiar: it designs all the major apps on the phone as well as the hardware, uses all the latest chipsets (from Nvidia) and memory tech (from Samsung) and Foxconn does all the assembly. It also relies on longer update cycles: about a year passes before new hardware is released — there are no rapid-fire updates every few months. And when it lets buyers know the new phone is ready for sale on its website, customers swarm. When its latest device, the Mi 2 went on sale last year, 200,000 handsets sold out in two minutes, according to Xiaomi Co-founder and President Bin Lin.

A huge obvious difference between what Xiaomi is trying to do with its Mi phones and what Apple is doing with the iPhone: Xiaomi is building this all on Android.(s GOOG) It’s saving costs on a marketing budget (it has none, just advertises on Sina Weibo) but it saves itself a lot of money on production by getting the base OS for free. And it can then offer the phones for cheaper as well: Mi phones cost about the equivalent of $260. And, Lin noted, he’s competing with smartphones, including Apple’s, that “sell for twice that” in China.

Apple is desperate to crack the Chinese market, and it is gaining some momentum: CEO Tim Cook said sales in Greater China saw triple-digit growth in the final quarter of 2012. But Xiaomi is tapping into a need for something that Apple so far cannot: much less expensive phones that still have a similar vertically integrated approach that tends to create the best kind of user experience.

The handset maker has also figured out how to work in a market that relies heavily on unsubsidized phones — Lin said about 70 percent of the Chinese market is unlocked phones not subsidized by carriers. In developed markets Apple can get away with charging $600 for an unlocked phone, but in developing markets, it’s easy to see how the iPhone’s higher price may be a status symbol for some, but for those that can’t afford it, pretty much out of reach.

Cracking the Latin America market

In Latin America, Apple also faces an uphill battle in countries like Movile’s home of Brazil. Android phones and iPhones are still about 20 percent of the market, Fabricio Bloiso Rocha, Movile’s CEO, said on Monday. The rest is made up of basic feature phones. The reason: all electronics, especially smartphones, are incredibly expensive in Brazil.

movile“Expensive in Brazil is not $200, it’s $2,000,” Rocha said. An iPhone is about 30 times more expensive in his country than in the U.S. because of “taxes, taxes and the mystery of the Brazilian economy,” he said. As a result, carriers like his focus right now on providing service for inexpensive prepaid phones (often just feature phones) with a la carte services sold bundled with data: things like mobile payments, video subscription services, food ordering services and more.

How does the iPhone fit into a picture like that? Big reform is coming to Brazilian taxes soon, Rocha says, so he believes there will be a place for smartphones to grow over the next 18 months in the country. But even then, he said, “I love the iOS experience. It’s the best UX, best product overall. But for Latin America, to invest there, you have to go Android because price is very important.”

Brazil is not directly representative of all of Latin America, but it’s the biggest and most populous country and represents a huge chunk of potential growth for the iPhone in the future. User trends in Brazil are the kind of thing Apple has to consider when broadening the iPhone and whether a lower-priced device makes sense to crack these markets sooner than later.

19 Comments

Guto Hernandes

As you probably can see by now, there’s no mobile carrier named Movile in Brazil. It’s merely a content provider, unknown to most people.

And I payed US$1.000 in my iPhone 4S here a year ago, directly from Claro (an actual Mobile Carrier, one of the top 3 in Brazil, part of América Móvil, one of the top 4 in the world).

Expensive, yes, but hardly “30 times more expensive than in the U.S.”

Karl Gretton

I think that Apple is already addressing the Brazilian market. Foxconn is opening plants there and this will avoid the 60% import duty that is levied against foreign technology items…not that there is really much Brazilian technology beyond software.

Brazil is definitely an interesting market and I enjoy spending time there. The mobile market is red hot and the economy is interesting to study.

Ricardo Costa

Erica,

As a Brazillian, I applaud your interest, but there are problems with your report:


Given USD = US Dollar; BRL = Brazillian Real.

A sim-free iPhone 4 can be bought in the US for USD 450. Assuming 6% tax, USD 477.

In the last months, the exchange rate has been around 2 BRL/USD, so the same iPhone 4 should be around BRL 954.

One can be bought today by BRL 1099 (http://store.apple.com/br/buy/home/shop_iphone/family/iphone4) the actual factor for a brazillian-assembled iPhone 4 is around 1.152.

The 4S and the 5 aren’t assembled in Brazil; also the five is not sold here directly by Apple yet, so I’ve taken a carrier, unsubsidized price of BRL 2,500. For those, the factors are, respectively, x1.46 and x1.817

So, we’re talking of a *nominal* difference of about 15% to 82%. Huge, in the case of the 5, but nowhere near 30 times.

Even going by adjusting the values by OECD’s Household net adjusted disposable income – 2009 data available at http://www.oecdbetterlifeindex.org/topics/income/ – which is a best-effort on our part, the article doesn’t touch on this, we find a factor of 4.7, with Brazillian income at USD 8,007 and US income at USD 37.708.

Compounding the factors, 4.7 and 1.817, we get a worst-case scenario of 8.4; Again, huge, but not 30x.

The real fail of the article is by not taking this second factor, income inequality, instead going by the word of a company CEO, a company mislabeled as the “Greatest Wireless Company in Brazil”, which is absolutely, utterly not true, as pointed by many other commenters, here and in other sites: Movile is a medium-sized content creator, not a carrier, not an operator – http://en.wikipedia.org/wiki/List_of_mobile_network_operators_of_the_Americas#Brazil

This income inequality means, simply put, that there just aint’ many people able to buy iPhones. But the problem isn’t taxes anymore, but income, while even some few years ago its was low income AND taxes.

Best regards.

Guto Hernandes

Great comment Ricardo.

Why research, right? This is just a blog.

fanofmobileapp

If Apple want to wide their market, they have to consider about the finance situation and policy of a country. China is a potential market but Brazil… I think that it seems to be difficult

Ricardo Costa

Erica,

I applaud your effort to look at the challenges Apple face in Brazil, but I think you’ve been misled, intentionally or not.

The problem isn’t taxes, as it was even a few years ago, but horrendous income inequality. Please follow along:

Given USD = US Dollar; BRL = Brazillian Real.



A sim-free iPhone 4 can be bought in the US for USD 450. Assuming 6% tax, USD 477.

 In the last months, the exchange rate has been around 2 BRL/USD, so the same iPhone 4 should be around BRL 954.



A brazillian-assembled iPhone4 can be bought today by BRL 1099 (http://store.apple.com/br/buy/home/shop_iphone/family/iphone4). 

So the actual factor for a brazillian-assembled iPhone 4 is around 1.152.

The 4S and the 5 aren’t assembled in Brazil; also the five is not sold here directly by Apple yet, so I’ve taken a carrier, unsubsidized price of BRL 2,500. For those, the factors are, respectively, x1.46 and x1.817

So, we’re talking of a *nominal* difference of about 15% to 82%. Huge, in the case of the 5, but nowhere near 30 times.

Even going by adjusting the values by OECD’s Household net adjusted disposable income – 2009 data available at http://www.oecdbetterlifeindex.org/topics/income/ – which is a best-effort on our part, the article doesn’t touch on this, we find a factor of 4.7, with Brazillian income at USD 8,007 and US income at USD 37.708.

Compounding the factors, 4.7 and 1.817, we get a worst-case scenario of 8.4; Again, huge, but not 30x.

The real fail of the article is by not taking this second factor, income inequality, instead going by the word of a company CEO, a company mislabeled as the “greatest Wireless Company in Brazil”, which is absolutely, utterly not true, as pointed by many other commenters.

This income inequality means, simply put, that there just aint’ many people able to buy iPhones. But the problem isn’t taxes anymore, but income, while even some few years ago its was low income AND taxes.

Best Regards.

leicaman

My iPhon 4 is now in Brazil. Didn’t understand my friend’s reaction to my charging him $100 for it. Now I do! His wife is very happy.

fetre

Movile is not a brazilian carrier. It is a brazilian tech company developing apps for mobile carriers.
Mobile carriers in Brazil are VIVO (Telefonica), CLARO (Carlos SLIM´s), TIM (Telecom ITALIA) and OI (LULA´s – it´s a joke, of course, OI is the brazilian company created under Lula presidency). There are the smaller ones like CTBC.

The high prices are due to years of non investing in basic infrastructure and monstruous corruption. Taxes are ridiculously high, especially if compared to what you get in return, but they are only a decoy for the actual problem: massive corruption.

There´s a huge amount of feature phones in Brazil because 80%+ of mobile phone base is pre-paid. Probably, the remaining 20% of post paid phones are all Iphones and top Android models.
The carriers are giving away iPhones, and you can get an Iphone 4 for US$ 200 with you tie it with a 12 or 24 months post-paid voice package of USD 120.
I got an iPhone 4 for my wife for USD50 with a post paid plan of USD60 montlhy, last year with CLARO.

Brazilians are incredibly heavy users of technology, internet and all things related. If they have access to better tech with smaller prices (or longer financing), they´ll grab it right away.

Bruno

Movile is a content provider, not a carrier. An iPhone obviously is not 30x more expensive in Brazil. An article not intended to be read by the Brazilian folks, since it doesn’t show the reality here

winstuff

Apple will do a world phone when it makes sense. But why now? Apple dominates the US and still competes worldwide. Here’s the real deal: The US carriers have to pay Apple about $450 a unit. If it put out a cheap plastic phone right now, Apple would be guilty of product mismanagement big time.

You pay the same hidden fee to carriers whether you buy the iPhone 5 or a free phone. But carriers pay the phone maker a lot less than $450 on older iPhones or cheaper plastic phones. So the newest iPhone subsidy gouges only the US carrier profits. Buying anything else is just handing cash back to the carrier.

When carriers drop the subsidy model, Apple will present its world phone. it’s the iPhone that is wrecking the subsidy model, in fact, cus’ it put a dent in carrier profitablity. Don’t believe for a minute Apple doesn’t have a world phone in the pipeline. But don’t assume it’s the same build quality as the iPhone today. Today the US carriers pay for that top end build quality. Thankee.

Hate your carrier, buy an iPhone. But yes, if you love your carrier and two year contracts at exorbitant rates, buy a cheap or unlocked phone; your carrier will be delighted. You just saved them a heap.

Tiago Bastos Da Silva

Hi Erica Ogg, I’m Brazilian and there is no big or even small wireless carrier in Brazil called Movile.

Rocwurst

Actually, Apple is already doing very well in China with 73% marketshare for the iPad according to Analasys International and 11% marketshare for the iPhone according to Strategy Analytics.

Now that 11% may not sound like much but the iPhone is not yet available on or compatible with the biggest carrier in China which has a massive 730 million subscribers (almost three quarters of a billion!).

This means the iPhone has an enormous share of the other two carriers and is only 6% behind the number one smartphone manufacturer Samsung even though Samsung smartphones are available on all carriers in China.

As such, there is no reason why Apple should introduce a lower cost iPhone in China at all.

YRamos

Guma Ogburn is right. There’s absolutely no way an iPhone in my home country, Brazil, is 30 times more expensive than in the U.S – three times would reflect the reality, probably.

Deepak Dixit

India is also One of the Biggest market in world they have to think about to reduce the price in india. Once they reduce the price around 100-150 US$ They can easily Rule in the smartphone industry in India. If they rule in india they can reach the top of smartphone selling in world.

Guma Ogburn

Erica, I think Mr. Rocha said/meant THREE times more expensive in Brazil. I live here and a Brazilian Real (R$) is about 1/2 a dollar. The 8GB iPhone 4 costs US$500, the 16GB 4S US$800. The 16GB iPhone 5 is US$1,200. All phones are sold unlocked. So it is actually 1.5 to 2X more expensive for an unlocked iPhone.

“Expensive in Brazil is not $200, it’s $2,000,” Rocha said. An iPhone is about 30 times more expensive in his country than in the U.S.”

Flavia

But if you compare to the USA economy, the cost of living and the reality of the Brazilian salary, yes it is 30x more expensive.

Guto Hernandes

Flavia, it’s actually not.

There are many brazilians buying apartments in Miami right now. Do you know why? Because it’s cheaper than São Paulo or Rio.

So the statement is not taking cost of living in consideration, it’s just plain wrong.

racrof

If you can lessen the cost for iphones in all emerging markets, apps can realize greater potential, therefore the market grows even stronger than expected, give them Imagination, the biggest selling films and their offshoots come from the imagination, we all love our avatars and star wars way back to peter pan and Alice in wonderland and snow white with her dwarfs.

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