Apple add-ons ripe market for local firms
Shenzhen manufacturers make more than $1.5 billion a year from iPhone and iPad accessories
Walking through the Huaqiangbei area of Shenzhen, it is not uncommon to see crowds of people thronging the shops selling accessories for Apple’s iPhone and iPad. Known as the “first street of electronic products” in China, Huaqiangbei attracts 300,000 to 500,000 shoppers every day for products as diverse as regular iPhone cases to customized earphones and large volume portable batteries. But what makes the street really unique is that it is the destination of choice for Apple aficionados from China and abroad.
Not surprisingly in Shenzhen, there is a whole genre of industries that thrive from producing accessories for Apple products, cashing in on the immense popularity of the US company in China. These 500-odd companies in Shenzhen realize profits of more than 10 billion yuan ($1.58 billion) every year from Apple accessory production and sales, according to statistics provided by the Shenzhen Mobile Communications Association.
“Manufacturing of Apple accessories is yet another growth engine for small and medium-sized enterprises in Shenzhen,” said Sun Wenping, the executive president of the association.
According to Sun, the Apple accessory industry is on the fast track to growth as it offers high revenue prospects and steadily growing user numbers.
“The normal profit one can expect from a cell phone in Huaqiangbei is around 10 yuan to 20 yuan. But an iPhone case, with a manufacturing cost of around 20 yuan, can fetch a sales price of as much as 200 yuan in an authorized store.”
Statistics from Analysys International, a Beijing-based research firm, shows that in the second half of last year, the total number of iPhone and iPad users in China grew from 2.26 million to 3.15 million, a growth rate of 40 percent.
For accessory makers the propelling factor has been the growing popularity of Apple devices in China, Sun said.
Early mover
Hali-power was one of the first companies in China authorized by Apple to produce accessories. Set up in 1984, Hali-power has been designing and producing batteries for cell phones for more than 25 years.
In 2007, when Apple launched its iPhone 3, the company realized that unlike other cell phones its batteries were embedded and power-intensive. To address this problem it realized that it needed to team up with external accessory makers to provide solutions.
Sensing an opportunity for cooperation, Hali-power entered into negotiations with the US company and in 2009 became a provider of Apple-approved components.
Though the entire process was lengthy and time-consuming, Xiao Dingbang, PR director of Hali-power, said that it has been a rewarding experience for the Shenzhen company.
After its association with Apple, Hali-power saw a jump in its fortunes with its sales tripling in 2010. Xiao, however, did not reveal any numbers or the profit margin.
More importantly, the company saw a dramatic improvement in its R&D and manufacturing capabilities after teaming up with Apple, he said. It also helped in the company’s transformation from an original equipment manufacturer to a manufacturer with its own brand, Xiao said.
Every product made by the company carries a label on it, reading “Made for iPhone” or “Made for iPad”. Its products span four categories – portable batteries for Apple, universal batteries for all smartphones, printers and projectors for iPhones.
Hali-power has launched its own brand of peripherals called MiLi and spends about 5 percent of its revenue on marketing and promotion. The company is considered one of the leading portable battery makers in China, and its products are stocked by most major electronics retailers such as Gome and Suning.
The Apple accessory industry in Shenzhen can broadly be classified into two categories. While one set of companies provides extra functions such as portable batteries, another section makes things like iPhone cases and protective screen sheets.
Different strokes
Though the authorized producers are very few, there are a vast majority of unauthorized accessory producers in Shenzhen, with their own ways of building the brand and the market.
In a market that is also in sync with high fashion, it is not uncommon to see accessories sporting a gender.
“Nowadays one can find various masculine phone cases in the market. We feel that the time is ripe for female-oriented products,” said Anil Utkulu, product supervisor at TTAF Elektronik, a Turkish company.
TTAF has more than 20 years of experience in cable design and production. In 2009, the company entered China and started building up its own brand by producing cases and bags for Apple.
Last year, the company’s revenue more than doubled to $6 million, with 90 percent of it coming from sales of Apple accessories. The company hopes to achieve 30 percent to 40 percent sales growth this year.
Utkulu said that the company is now looking to launch products for female customers aged over 28. “They are the missing target segment in our sales strategy and the ones who are most likely to change their accessories constantly,” he said.
After eight months of negotiation, the Turkish company managed to get a three-year license from HBO to launch cases featured on the US TV series Sex and the City last year. The royalty fees were about 600,000 yuan per year.
Not surprisingly, the company also has two distinct lines of business – TTAF, the male-focused brand, and Sex and the City, the female-focused label.
Chen Zhuopeng, general manager of TTAF China, said that the HBO TV series had a mature target audience and it wanted to cash in on its popularity. “It saves us both time and effort in market research and brand promotion.”
Since the launch of the Sex and the City cases in January, the company has sold more than 40,000 units, accounting for 60 percent of its total accessory sales. The series contains nine cases and each case has a retail price of about 228 yuan. Plans are afoot to expand the range with new additions every six months.
Utkulu said that by next year, most Apple accessory producers in Shenzhen will be “wiped out”, as they lack a clear branding strategy.
“To operate a factory and a brand is totally different. It is more than just putting a logo on your product and going to an exhibition. You have to locate your end consumers, and then promote the brand,” he said.
For TTAF, the most important aspect in its marketing strategy is undoubtedly the extra emphasis on design and branding. More than 90 percent of its workforce focuses on design. This year, the company has earmarked about 2 million yuan for exhibitions and 50 million yuan for design.
Testing times
But the biggest threat to most companies comes from the scores of copycat manufacturers in Shenzhen. Chen said that copycat versions of new cases launched by TTAF could be found in the local market just a week after the original’s launch.
But that situation is slowly changing, Utkulu said, as the market is slowly moving toward original accessories. “Such a move will improve industrial standards and raise consumer awareness.”
As it is widely expected that Apple may launch the iPhone 5 in October, there is a mad scramble among accessory makers in Shenzhen to find ways of being associated with the phone.
“Not only us, all the companies that produce accessories for Apple are paying close attention to its new products and launch information. We want to take advantage of this to launch our products,” said Lu Yifeng, vice-president of BG Microse, a Shenzhen company that makes cases, screen sheets and portable batteries.
Lu said accessory makers have to undertake careful research and intricately understand the product specifications of the new model. This will help the manufacturers bring out the accessories within a month of the phone’s launch, he said.
“Competition is really fierce and it is a case of the early bird getting the worm. If our products reach consumers first, we will have the advantages of better sales channels and higher prices.”
The company has already made six rough designs for the iPhone 5. Lu said that it will adjust the size of its design and put it into production immediately after the phone is launched.
The company posted revenue of 3 million yuan in 2008 and since then the numbers have been growing steadily by 30 percent every year.
Though he has made a fortune from Apple accessories, Lu is well aware of the potential risk of putting all of his eggs in one basket.
“If Apple stops launching new products, then what would we do?” Lu said.
“We always have this concern and are looking for safer ways to broaden our revenue streams.”
To mitigate some of this risk, Lu said his company has shifted its focus to portable batteries.
Currently, 90 percent of the company’s sales are from iPhone and iPad cases and 10 percent from portable batteries, but Lu hopes that the percentage of battery sales will increase to 30 percent or 40 percent in the long run.
“There will be no substitute for portable batteries. We can serve Apple, and other brands like Samsung and HTC. In the next three to five years, portable batteries will be the big thing as there is growing demand for mobile devices,” Lu said.
Xiao from Hali-power also shares Lu’s concerns. “Previously popular Nokia phones have seen a dip in their fortunes and market share. Apple is not doing well at the moment, but who knows what can happen in the next three years. If Apple falls, we will all fall down. We cannot afford that risk,” he said.
“Apple does enhance our business, but we cannot be tied to the brand forever.”
Last year, Apple accessories accounted for 90 percent of Hali-power’s total sales. But Xiao said that figure will dip below 50 percent this year. And it will fall to as low as 30 percent next year, he said.
Xiao attributed this to the fast-growing “universal products” sector.
“Our universal sector has been growing steadily. Nowadays other smartphone brands such as Samsung, HTC and Motorola are catching up really quickly. Unlike Apple, they are all compatible with USB connectors and do not need any special design.”
In March, South Korean phone major LG Electronics bought 60,000 units of the Power Star, a 2000mAh portable battery, from Hali-power.
“The accessories market is quite risky and it is not good to fully rely on Apple for future development.”
Xiao said that the company used to focus on being an exclusive producer for Apple. That has changed and the main focus now is to gain more business with universal products, he said.
“We want consumers to know us as MiLi, a brand of portable batteries not only for Apple, but also for other brands. That is the direction in which we are moving.”
Sun from Shenzhen Mobile Communications Association said that most accessory makers are still reliant on Apple.
“Most SMEs are reaping huge profits due to the immense popularity of Apple products in China and the fact that the US company does not make its own accessories. But that possibility still exists in the future and is an impending threat.”
“A quick response to the market and a timely strategy adjustment are crucial for the survival of small and medium accessory makers in Shenzhen,” Sun said.
