Apple's [AAPL] focus on the emerging Chinese market is exposing the company to the gamut of problems Western firms face trading there, and the current patent litigation which is seeing iPads pulled from Chinese retail channels is just the latest in a series of challenges the company has faced in the country. However, these problems don't reflect anything the company is doing wrong, they simply provide a textbook example of the challenge of doing business in China.
[ABOVE: Apple saw a riot outside its Beijing retail store when it first launched the iPhone 4S, causing the company to offer the device online only.]
This Proview challenge
Right now Apple is battling with local Chinese firm, Proview Technology for use of and control of the iPad name. Facing bankruptcy, Proview is attempting to get Apple to cough-up nearly two billion dollars for the right to use the name. Apple counters that it has already signed and paid for a licensing agreement with the Chinese firm, which the latter now chooses not to honor.
During an angry four-hour hearing, Apple's lawyers today argued that the iPad is of great economic benefit to China. "They have no market, no sales, no customers. They have nothing," Apple lawyer Qu Miao said of Proview. "The iPad is so popular that it is in short supply. We have to consider the public good."
[ABOVE: Look! A MacBook Air clone from 2009. It runs Windows. And was made in China...]
That doing business in China is complicated is widely-known -- take a look at this document from the State of Georgia for confirmation of this. Local bureaucracy operates according to different rules, patent, copyright and trademark rules are enforced differently, and the market is open to all sorts of complexity.
Firms doing business in China must also build good relationships with government, and ensure partners will actually do what they say they'll do.
Here's what Georgia State has to say: "It is also critical that companies make sure that their partners are reliable and that they have the right motivation. Make certain your client or partner is able and willing to do all he says he will do in the contract. Ensure that it is in your partner's best interest to perform as agreed. It is in his interest to assist you to protect your brand or other intellectual property rights. Check the reliability of information on your partner or customer via independent sources.
"Unlike the US government, which places few restrictions on business, the People's Republic of China government plays a significant role in business in China. Thus, it's extremely important to establish good relationships with the Chinese government."
[ABOVE: All the fun of a real Apple Store. Which isn't. Though these were in China.]
In the case of Proview, Apple has clearly reached a business arrangement with a partner who has proved neither reliable nor appropriately motivated. My simple solution to this would be to market the iPad in China as the "Apple iPad", a quick-fix that would easily be achieved by sticking Apple stickers on the box, though I've no legal clue as to whether such a simple-seeming solution would be sufficient.
A recent statement from Chinese customs that preventing exports of the device would be troublesome hints that the PRC government isn't fully behind its rogue trademark-holder. Apple brings billions into the Chinese economy, after all.
To these complexities you can also add China's thriving market in grey imports and outright copies. Copies? Who can forget the chain of Apple-branded retail stores that appeared all across the country just last year. These facsimiles of the real thing offered Apple-branded clone devices in Apple retail-like environments. People working in these stores even thought they were working for Apple!
The gray market thing
Then consider those queues of Chinese nationals outside Apple retail stores worldwide. These people aren't there because they're short of fun, rubber-clad or otherwise, they are there to purchase their full allocation of iPhones for subsequent removal to and grey market sale throughout China.
Chinese Apple product clones are highly convincing, though they aren't the real thing, aren't as well-made and frequently run other less sophisticated operating systems. But hey, they carry an Apple logo, right?
At this point I would like to stress product cloning is a problem that afflicts every device manufacturer in China, but with Apple so popular there right now, such challenge inevitably has a huge effect on the firm.
More recently you can add labor relations -- and labor rights -- to the list of complexities Apple faces in doing business in the world's most populous country. The company is working hard to address these problems, but they do add yet another level of complexity.
A strong front
Will Proview prevail in its dispute with Apple? That's hard to predict. I'm not a lawyer and certainly no expert in Chinese trademark litigation, but given the trademark-claiming entity faces bankruptcy, I suspect the easiest fix will be to reach a new licensing deal:
In the way of that outcome sits Apple's desire to ensure Proview can't sue for the same reason in future, and that other Chinese partners don't detect such an arrangement as a sign of weakness and immediately move to raise their own litigation against the firm. In other words, that easy fix could generate even more complexity.
So, accepting that China is a challenging market, is it worth it for Apple? The short answer is a resounding "yes".
China will be Apple's biggest market
China is at the heart of Apple -- its factories produce the products we buy; Apple retail in China is a growing success story and the imminent introduction of the iPhone 4S via China Telecom will deliver a massive boost in sales of that device. Despite the challenges, Apple is on a roll in what will become its biggest global market.
Apple knows this, which is why it intends opening at least 25 retail stores in China. That China is Apple-crazy is evident in the gigantic queues which greet every Apple retail store launch. Revenue in Apple's Asia Pacific market climbed 58 percent, year-on-year.
Apple CEO, Tim Cook last month said: "China is an extremely important market for us, and we continue to look at how to grow it further."
That Apple faces challenges in this complex market is inevitable. How it deals with these challenges will set a classic example for other major Western firms looking to grow their business there.
These challenges also represent an opportunity for Apple to figure out how to do business in other emerging markets, with India and Brazil seemingly set to be the next two territories the company intends expanding its presence within.
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