Apple Invades China! World’s Biggest Market Potential

Why should investors care about Apple’s (AAPL) invasion of China? After all, the company’s first store opened in Beijing two years ago. Sales of the iPhone by China Unicom (CHU) have been disappointing.
Try taking a hint from the Chinese.
The opening of the new Apple store in Shanghai over the weekend was spectacular. Thousands of Chinese Apple enthusiasts walked, drove, and flew in to attend the event at the foot of the Oriental Pearl Tower on Saturday.
The new store is a stunner. Under a forty-foot glass cylinder sprawl 16,000 square feet of sparkling retail space. With 175 employees, the Shanghai flagship store will have the largest “Genius Bar” assisting customers in the world.
The Shanghai opening matters because it signals that Apple is finally getting serious about the Chinese market. China is the second largest PC market in the world but so far Apple has barely made a dent.
The CEO of Lenovo (LNVGY) joked with Shanghai Daily, saying, “"We are lucky that Steve Jobs has such a bad temper and doesn't care about China. If Apple were to spend the same effort on the Chinese consumer as we do, we would be in trouble.”
Apple is the world’s largest technology company by market cap but that doesn’t mean it will ruin Lenovo’s business. That’s not the strategy.
APPLE GETS SERIOUS
The throngs attending the Shanghai store opening demonstrate something that Apple learned with its stores. New stores create buzz.
Selling Apple’s high-end products depends on clever marketing. This will be especially important in China where average salaries are lower than in most of the company’s established markets.
That’s why Apple intends to open 25 stores throughout the country by the end of 2011. That’s a major push even by Chinese standards.
Apple won’t say where the stores will be established but there are already rumors flying around Shanghai that a second store will open there in a popular high-end mall.
Doubters point out that Lenovo computers are sold through 10,000 retail outlets. By that standard the Apple invasion may seem tiny.
But Apple is targeting a surprisingly large contingent of upper middle class buyers. With Apple’s 23% profit margins, there’s a lot of money at stake.
Buzz is also critical to iPhone sales. China Unicom has sold only a million iPhones. But another two million have been bought on the grey market from tourists and smugglers.
Demand is definitely growing. During the last quarter only 100,000 iPhones were sold at a price of 7,000 yuan, more than $1,000. Now sales have zoomed to an average of 10,000 a day.
Apple isn’t trying to compete for Lenovo’s 0.3 percent profit margin in the PC business. Apple wants to be the Louis Vuitton of computers in China. In fact the Oriental Morning Post reports that Apple will aim to match Louis Vuitton’s (LVMUY) China presence.
A MASSIVE MARKET OPENING
Apple in China aims to be much more than a boutique. Morgan Stanley’s Apple analyst, known for being bearish has become a bull on China.
Last January Katy Huberty told Fortune magazine that there are about 50 million potential Apple customers in China. Sales of iPhones could hit five million a year!
Apple’s growth momentum in China has raced past the U.S.
What about the high cost of smartphones? Lower income countries love them.
Morgan Stanley says there is strong interest and awareness of the Apple brand in China.
Long before the Apple store opened in Shanghai, Morgan Stanley’s bearish analyst predicted a rosy future. Her estimate: shares will trade at $325 to $425 by the New Year.

Open Letter to the President

Dear President Obama,

Facing the global financial crisis, record U.S. unemployment and two wars, I understand that you have a great many issues occupying your time. However I feel compelled to speak out about one of the key issues that needs greater attention from your administration: China.

You are understandably aware of your unique role in American history. I would respectfully submit that America, which regards itself as the world's lone superpower, is at a turning point equal to the events preceding the collapse of the Soviet Union. The economic rise of China, the world's most populous nation, is the global event of our times. Yet American policies towards China have not kept pace. Indeed, recent political events in Washington suggest that America is moving towards an antagonistic relationship with the Chinese at a time when we need Beijing's cooperation.

As you are no doubt aware, China has become the world's number one holder of U.S. currency and equity assets in an amount that may be approaching one trillion dollars. There are those who suggest that the United States embark upon a showdown with the Chinese in order to force Beijing to revalue the yuan to a level that some consider fair. Reckless voices in Congress advise that there is little risk in threatening the Chinese because they would stand to lose hundreds of billions of dollars if they began dumping dollar assets. This ill-considered assumption puts the nation's tenuous finances at risk, based on a an appalling lack of understanding of China's state of mind.

As one of the world's oldest civilizations, China is rightly proud. The paper money that your treasury prints was an inovation invented in China. The explosives that underlie America's military force originated in China thousands of years ago. After enduring a period that some Chinese call "the one hundred years of humiliayion" at the hands of foreign powers, the Chinese people are exquisitely sensitive about foreign intervention and justly proud of the economic success they have achieved in just three decades.

Because it is a robust military and nuclear power, an economic giant and a space-faring nation, China is impervious to threats from the United States. Yet the heavy hand of threats and intimidation are allowed free rein in Washington. This is a state of affairs that China can no longer acdcept.

Some have observed that you, Mr. President, have been treated with disrespect in meetings like the climate negotiations in Copenhagen. I would submit that the Chinese are giving back the same kind of treatment that they feel they have received.

To be sure, there are philisophical, political and economic concerns in China that America disagrees with profoundly. That is unlikely to change. Indeed, foreign pressure upon the Chinese to alter internal affairs to suit our preferences is likely to have the opposite effect, contrary to America's desires. Because China is a proud nation it will resent and resist even the best-intentioned foreign calls for change. Neglect or arrogant calls for adherence to American values will breed only resentment.

Despite its burgeoning economic and military strencth, China maintains that it is not a new superpower. Three to four hundred million people have risen to what we call middle-class status, a number roughly equal to the population of the United States. Yet twice that number of Chinese people remain mired in poverty. That is why China regards itself as an emerging nation. Beijing is determined to eliminate the poverty and pollution that go hand in hand with under-development. Beijing will not accept foreign dictates that run counter to this determination.

If America chooses to dictate policy to China, the result will be counter-productive. But if the United States chooses the path of cooperation and mutual respect with the Chinese, the results can be beneficial to both sides.

America, unlike Britain and Japan, does not have a history of crushing Chinese aspirations. In fact the U.S. and China cooperated in eliminating Japanese imperialism during World War Two. It is this kind of cooperation and mutual respect that must set the tone for future relations between Washington and Beijing.

The rise of China is the pivotal event of the 21st century. How America manages its relationship with China will set the tone for the next 100 years of history.

President Obama, domestic concerns are looming large, but America's relationship with China will be pivotal. The U.S. may choose the path of confrontation and embark on a path similar to the cold war. Or, the United States may set its priorities andemploy its diplomatic skills in a way that creates a new era among billions of people.

I urge you to place America's relations with China at the top of your priority list. The result will set the tone for the century.

Respectfully
George Wolff

PREMIER WEN’S EMMY AWARD

PREMIER WEN’S EMMY AWARD

The shock waves that accompanied Chinese Premier Wen Jiabao’s CNN interview last September have subsided, but not permanently. For those who didn’t see the program, it was the reclusive Premier’s first interview in five years.

He granted the privilege to CNN’s most respected global personality, Fareed Zakaria. During the course of a wide-ranging 45-minute interview, Zakaria raised a number of topics that are utterly taboo to discuss within China. There were a number of breathtaking and dramatic moments as Premier Wen and his interpreters struggled to cope with a situation that would have registered as an unimaginable insult in China’s hierarchical society.

It was likely the drama of the moment that won Zakaria an Emmy nomination for the interview, but on reflection the interview was memorable for entirely different reasons. Last week CNN aired the interview again, and I was amazed at how much it revealed. (You can watch it yourself by going to http://www.cnn.com/CNN/Programs/fareed.zakaria.gps/ on the CNN website or simply google the search terms Fareed Zakaria gps).

For those who doubt the Chinese leader’s mastery of capitalism, watch how he handles questions about the free market. To Zakaria’s apparent surprise, Premier Wen refers eloquently to the concepts from Adam Smith’s seminal books on capitalism. Wen makes the case that Smith’s “invisible hand” of market forces can coexist with the “visible hand” of government intervention.

He was prophetic. Within six months of the first airing, both Beijing and Washington had pumped more than a trillion dollars of stimulus money into their respective economies to stave off a global financial catastrophe.

Premier Wen also refers to the twelve books of the “Meditations” written by the Roman emperor, Marcus Aurelius. In his writings, the stoic Aurelius argues against indulgence in emotion, a skill which, he says, will free a man from the tumult of the material world. He says the only way a man can be harmed is to allow his emotional reaction to overpower him. Wen argues against over-reaction to the financial crisis.

This is what is so memorable about Wen’s rare interview, not the emotional restraint we see as the interviewer broaches Chinese taboos. Instead it is Wen’s intellectual breadth and worldliness that gives a clear sign to the world that we are dealing with a Chinese leadership which is determined to engage itself with the real, post-communist, unabashedly capitalist world.

Asked if he is nervous about Chinese holdings of U.S. debt, Premier Wen makes it clear that he wishes for constructive engagement with the U.S. economy for many decades to come.

On the issue of China’s status as a superpower, Premier Wen demurs. He says China has no claim to be a superpower and no desire to infringe on America’s claim to superpower stature. Clearly, the Premier is taking a “walk softly and carry a big stick” approach to China’s international status. China certainly has the money and the political clout to wield more international power, but Wen deftly avoided being snared. He ducked questions about using Chinese influence to curb Iran’s nuclear ambitions although he does take credit for helping manage ongoing problems in North Korea.

Surprisingly, Premier Wen tacitly admits to the imperfections of the Chinese justice system by arguing that it must be reformed. The rule of law is essential to civil order, and currently China is plagued by tens of thousands of angry demonstrations every year. Provincial courts and administrators have made it extremely difficult for China to impose the regulations and laws essential to a smoothly-functioning capitalist system.

The Chinese Premier also acknowledges the need to move towards a governmental system that is more representative of the will of the people. Not surprisingly he stops well short of a call for American-style democracy. But it is significant that Wen represents a force for gradual change and reform.

He is a subtle and restrained man. As an admirer of Adam Smith, Premier Wen has sent a signal that he is well-informed and sincerely committed to the principles of capitalism.

I highly recommend that you set aside 45 minutes to watch Premier Wen’s interview. In the vast wasteland of television, it is an enlightening and subtle experience that is essential to understanding the leadership of modern China.