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Why Apple Inc. (AAPL) Is the Only Domestic Tech Giant That Can Succeed In China

Surely by now you’ve heard that Apple Inc. (NASDAQ:AAPL) is having a grand old time in China. The Mac maker is now up to $26.6 billion in trailing-12-month sales in the “Greater China” region, a 31-fold increase from all of fiscal 2009. That’s incredible success over the span of just four years, but there’s another notable absence here.

No other domestic tech giant has ever been able to put up that kind of growth in the Middle Kingdom. Why is Apple Inc. (NASDAQ:AAPL) the only one that can succeed in China?

Apple Inc. (NASDAQ:AAPL)

Microsoft Corporation (NASDAQ:MSFT): Piracy
Chinese consumers have a very low propensity to pay for intellectual property, including software. That’s evidenced by incredibly high piracy rates for software; bootleg copies of content are readily available everywhere. There’s even rampant piracy in the enterprise. That has made the it incredibly difficult for Microsoft Corporation (NASDAQ:MSFT) to penetrate the country, since it’s a software company.

A Business Software Alliance report from May 2012 pegged software piracy rates in China at a whopping 77%. For example, an illegal copy of Microsoft Office can be had for just $2, significantly less than a legitimate version that costs $64. As high as that 77% figure is, that’s actually an improvement.

When former Chinese president Hu Jintao visited the U.S. in January 2011, Steve Ballmer grilled him on intellectual property issues in China while saying that 90% of Microsoft users in China use pirated versions. Selling software in China is a tough proposition considering how Chinese consumers feel about actually paying for it.

Microsoft’s Surface tablet is a different story, though, as a device with integrated hardware and software. The software giant began selling Surface tablets in China in October. However, Surface isn’t yet a meaningful business relative to Microsoft’s core software offerings. China also has a ban on video game consoles, so there’s no hope for its Xbox 360.

For now, there’s no way for Microsoft to see monster growth in China.

Google Inc (NASDAQ:GOOG): Censorship
As one of the biggest proponents of an open Internet, Google Inc (NASDAQ:GOOG) was always bound to butt heads with the Chinese government over censorship issues. The search giant famously pulled out of China in early 2010 over censorship, redirecting users to its Hong Kong site where it was free to display uncensored results. That was an opportunity for Baidu.com, Inc. (ADR) (NASDAQ:BIDU) to continue growing its share as the “Google of China.”

China is a hard market to ignore, though, with a swelling population of netizens. Two years later, Google said it was pushing back into the Middle Kingdom. The company then added a warning when results may be censored, which was just recently removed last month since it was proving more trouble than it’s worth.

Even though Android is the dominant mobile platform, grabbing over 90% market share in China, that ubiquity is not doing Google any favors. Since Android is open-source, OEMs are free to grab the source code and modify it as they please, and what pleases them is removing all of Google’s ad-supported apps and services in favor of more popular local alternatives like Baidu. That’s why Baidu is the default search engine on 80% of Chinese Android phones.

Android benefits Baidu more than it helps Google.

Facebook Inc (NASDAQ:FB): Great Firewall
China’s Great Firewall also blocks access to the largest social network on the planet, Facebook Inc (NASDAQ:FB) . The company has cited “substantial legal and regulatory complexities” that have prevented it from entering China so far. Third-party estimates pegged Facebook users in China at 63.5 million, using a VPN service to scale the Great Firewall. However, those figures seem a little optimistic.

China is among several authoritarian governments that block access to Facebook in whole or in part, with others being Iran, North Korea, and Syria. Much like Google, that’s been an opening for local companies like Renren Inc (NYSE:RENN), which is now up to 48 million monthly active users.

Apple Inc. (NASDAQ:AAPL): Think Different
Since Apple Inc. (NASDAQ:AAPL) primarily sells hardware with integrated software at premium prices, it has become a luxury status symbol that can’t be easily replicated. There are counterfeit iPhone ripoffs, but when it comes to hardware, nothing can beat the real thing. Its gadgets are among other popular luxury brands in the country, like Coach, Inc. (NYSE:COH).

On the other hand, since Chinese consumers don’t buy as much content for the aforementioned reasons, that also reduces switching costs should consumer trends ever change. That makes Apple more vulnerable since its platform is less sticky in China than it is in developed markets where users load up on content.

For now, Apple Inc. (NASDAQ:AAPL) will enjoy its role as the one and only domestic tech giant that can succeed in China.

The article Why Apple Is the Only Domestic Tech Giant That Can Succeed In China originally appeared on Fool.com and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple and Baidu. The Motley Fool recommends Apple, Baidu, Coach, Facebook, and Google. The Motley Fool owns shares of Apple, Baidu, Coach, Facebook, Google, and Microsoft.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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