This report explores the market potential for investing in the mobile telephone applications (apps) industry in China, following government reports last week that mobile phones have trumped personal computers as the choice device for internet access in the country. The report includes a consumer analysis, a discussion of challenges firms entering the industry may face, and the potential use of apps as marketing tools.
By Ian Bhullar
Jul. 24 – Recent reports by the China Internet Network Information Center (CINIC) stating that the number of mobile internet users has exceeded the number of PC internet users are an indication of the dynamism of mobile technology-dependent industries in the country. According to CINIC, 388 million people in China are now using the internet on their mobile telephones, compared to 380 million people through desktop computers.
The Chinese app market has developed to the point where it is now the second largest in the world, having seen sales grow by 870 percent in 2011. China presents a highly conducive environment for app development, promising an enthusiastic consumer base as well as entrepreneurial designers keen to work for creative start-ups.
With well over a quarter of the Chinese population accessing the internet with mobile telephones, the demand for apps is clearly very large. According to data collected by Guohe, a Chinese mobile advertising firm, 48 percent of iPhone users and 36 percent of Android users spend two hours or more using apps per day.
In general, these users tend to prefer social networking, gaming and photographic/video-related apps. Indeed, 36 percent of 18 to 22 year-olds claim to use social networking apps more often than calling or text messaging.
Innovative facilities provided by some social networking apps are a large part of this pulling power. Programs such as Tencent’s Weixin, which enables users to leave voice-recorded messages, allows Chinese users to communicate conveniently without having to navigate complicated Chinese text input systems.
There is some willingness to pay for software, although this still lags behind Western users. Only 10 percent of Android users and 32 percent of iPhone users have spent more than US$10 on apps for their devices.
Since willingness to pay for apps outright is relatively low in China, many companies opt for alternative revenue sources. One prominent source is “in-app” sales, which require users to pay for additional application functions. On the international aggregate, this seems to be an effective revenue generator.
According to smartphone analyst Distimo, 72 percent of Apple’s App Store revenue comes not from initial app sales, but from in-app purchases. This is partly intuitive: providing an app for free builds loyalty and interest, laying the groundwork for future purchases.
Alternatively, advertising has yielded demonstrable returns for some. The BBC details the story of one Shanghai-based mother who designed a flashcard app for her children’s education. Pop-up ads attached to the app provide her with an income of around US$1,000 per month.
In spite of this large market and potential for revenue generation, challenges including a difficult competitive environment, intellectual property concerns and design constraints must be taken into account.
China has a healthy competitive environment for app consumers, especially social networking platforms. The popularity of Tencent’s QQ app derives from its established desktop computer-based instant messenger service, which has 600 million registered accounts. Weixin, which Tencent only launched in early 2011, has already garnered more than 100 million users.
Games may be even more competitive, with major players including Angry Birds on the scene. On the day of writing, 8 of the top 10 paid-for apps and 5 of the top 10 free apps fell within the “Gaming” category. Industry experts suggest that Chinese consumers move quickly from one product to another, which means both opportunities and challenges: consumers are open to trying new apps, but producers must keep up with changing tastes and accelerating competition.
“I can easily say foreign entrepreneurs working on apps, mobile and internet projects at large, easily double every year in China,” Bruno Bensaid, co-founder of investment banking advisory firm Shanghaivest, told Reuters.
Competitive challenges are compounded by weak intellectual property protection. Infamously weak IP laws in China do not provide much guarantees that app sales, so dependent on innovative ideas, will be safeguarded.
“Once you start to become successful, your app will be copied,” says Michael Clendendin from Red Tech Advisors.
As a solution, he suggests partnering with the larger companies likely to steal the app concept.
In terms of app design, it is important to note that Chinese mobile users mainly connect to the internet through slower GPRS technology due to the high cost of 3G. Designers should be careful to maximize speed by keeping app designs relatively simple, being conscious of the fact that many users do not have access to faster 3G technology.
Apps for marketing purposes
The strength of digital media in China also signals opportunities for firms in other industries. Mobile app development, for example, is a useful marketing tool for retail businesses looking to enter or monitor the Chinese market. In a bid to better understand Chinese luxury goods consumers, Harrods launched a Chinese-language Android app in early June 2012. The feedback from this app can be used to explore new ways to expand Chinese services, as such consumers make up a growing share of the company’s shoppers.
Online shopping is also increasing. Approximately 44.4 million people used mobile phones to make online payments at the end of June, up 14 million from the end of 2011. Online sales and mail ordering are currently restricted according to the Chinese Foreign Investment Industrial Guidance Catalogue, however.
China’s telecommunications industry is dynamic on a multitude of levels, as spending power increases and a large population demands increased connectivity. As the wider industry expands, demand for apps is emerging as an important growth sector.
A well-executed entry into the Chinese app market can reap enormous rewards, as evidenced by the success of Finnish Rovio, the makers of mobile-based strategy game Angry Birds. The company’s brand has become so well known that the company was able to open the first of 25 Chinese “Angry Bird” stores in Shanghai last week. In September 2011, the company announced that 40 million people had downloaded the game in China.
Peter Vesterbacka, Rovio’s marketing chief, even takes the intellectual property challenge positively.
“When you see all these knockoffs, you know that there is a lot of demand,” he says.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. For further details or to contact the firm, please email firstname.lastname@example.org, visit www.dezshira.com, or download the company brochure.
You can stay up to date with the latest business and investment trends across China by subscribing to The China Advantage, our complimentary update service featuring news, commentary, guides, and multimedia resources.
An Introduction to Doing Business in China
Asia Briefing, in cooperation with its parent firm Dezan Shira & Associates, has just released this 40-page report introducing everything that a foreign investor should be familiar with when establishing and operating a business in China. This guide is immediately available as a complimentary PDF download on the Asia Briefing Bookstore.