The following is my latest post on Digital East Asia.

It’s early days yet, but articles on Forbesand CNN last week have already began dissecting why Apple Inc.’s (NASDAQ: AAPL) iPhone had a rather spectacular failure of a launch in China. The widely quoted number from China Unicom (Hong Kong) Ltd. ((ADR) NYSE: CHU) is 5,000 units sold in 4 days, which is indeed an incredibly low number compared to first week of sales in US.

But is 5,000 units really that bad?

Before we start analyzing all the issues, some local perspective is needed here. The iPhone is an expensive machine. Even if it sold for half its price (the cheapest model is the 8GB 3G, at RMB 4,999 – USD 732), it would still be at the upper range  of the market. As some commentators have noted, that’s a third of the annual disposable income of urban residents in China. So by definition the iPhone is targeting at a very small addressable market.

According to an article (link in Chinese) on Phoenix TV’s news portal (interesting side-note – it’s called ifeng), an executive at Dopod (HTC) said that smartphones above RMB 3,000 (USD 432) in China usually have a lifecycle of 18 months and sell around 160,000 units. Another source said that the Samsung i908E, which launched at the end of last year to much fanfare as the first “deep partnership” (heavily customized) phone with China Mobile, has so far sold 120,000 units, or around 10,000 a month. The i908E is a direct competitor to the iPhone, with quite similar UI. Compared to those figures, the 5,000 in 4 days is not that bad.

And also according to ifeng, online and offline pre-orders of the iPhone totaled 140,000 units. When and how many of those pre-orders turn into real sales remains to be seen, but those are relatively respectful numbers.

What are the barriers to adoption?

Still, it’s obvious the launch fell well short of Apple’s expectations. And looking at it closer, a lot of things did go wrong and made the iPhone value proposition considerably less appealing. Here are five of those issues.

1. The App Store, or lack thereof: The China specific app-store is much less interesting. There certainly aren’t 100,000 apps. In fact, this is not just an issue with the China market – the App Stores in most countries have less to offer compared to the US version, due to whatever legal reasons. Sophisticated users will simply register for the US store, but you need credit card with a US billing address (at times there have been promotions when you could register without a credit card, which is how I got my account back in China). As a side-note, I think it will be very interesting to see App Store sales breakdown by geographic markets – I’m pretty confident it’s very, very skewed towards the US market. And of course Chinese consumers just aren’t used to paying for software – popular iPhone fan forums all offer pirated apps to install on jailbroken devices.
2. Lack of Wi-Fi module: Free wi-fi access is pretty prevalent in Beijing and Shanghai (all Starbucks and most coffee shops offer it for free), so having the wi-fi module disabled is a big blow, especially considering the 3G network isn’t that developed.
3. Switching barriers: Currently in China you can’t take your number with you when you switch carriers, which is a prohibitive barrier for serious business users currently with China Mobile Limited ((ADR) NYSE: CHL), the world’s largest mobile carrier. And China Unicom didn’t help themselves either, by restricting their own existing subscribers from using their current SIM cards on the iPhone – in a technical decision which has dire strategic consequences, even Unicom users must switch to a “186″ number (a number that starts with 186) if they want to use the Unicom 3G network, the rationale being this allows Unicom to easily distinguish 2G and 3G users. Surely there are other ways of doing this?
4. Pricing: Both the 24 month contract plans and the unit prices are steep for the market, especially considering gray market models have been available for a long time, and early adopters have all bought their phones. And Chinese users are really not used to the concept of 24 month contracts, and all the paperwork needed to get them (credit history infrastructure is very poor). Another interesting side-note here: cnbeta reports that (link in Chinese) China Unicom iPhones have already surfaced on the gray market, as hundreds of Unicom employees have signed 24 month contracts and then resold their phones – they can reimburse their monthly contracts, so they are literally getting a free phone to sell.
5. Poor marketing execution: For all its marketing savvy, Apple couldn’t really help China Unicom. Example: China Unicom’s 3G portal doesn’t even list the iPhone as a model in the list of phones available. Instead iPhone is tucked away in a separate part of the site (links in Chinese), which is confusing to say the least.

Is Apple clueless about China?

The current story does have all the signs of a classic business school case, and at the heart of it is really the fact that Apple, like many other multinational companies, has underestimated the difficulty and complexity of success in the Chinese market.

In closing, I would like to share another side-note. ifeng reports that(link in Chinese) on the launch event held at the luxurious high end mall “The Place” in Beijing (which has one of the world’s largest LED screens), Greg Joswiak, Apple’s Vice President of iPod and iPhone Product Marketing, spent half an hour touting the phone’s various features.

By the end of his speech, the devout fans who have been standing and waiting in the rain had become so restless that they started to boo and ask him to step down. Not understanding what the consumers were saying, Greg thought they were cheering for the features of the phone, which in turn made the audience laugh at him.

Yu Yingtao, the GM of China Unicom’s distributor subsidiary, had to go into the crowd to console the audience and do some crisis management. Some middle aged ladies near the front of the line (pause and think about the consumer segment for a moment) expressed, “we have been waiting here for 4 hours, why is he still selling us the features that we all know? We are the end-users!”

That I guess, shows how clueless Apple is about China.