The Apple Watch, China Edition

My thanks to World Time Widget for sponsoring this site. World Time Widget is the simplest and best way to track timezones. Read my full review or why I think you’ll like it. By now it is widely surmised that China will be a huge market for Apple Watch Edition.  Shortly after Apple’s Spring Forward event, Scott Galloway of L2 think tank said:

The high-end model they should call the ‘China’ watch as it’s clearly targeted at emerging markets, aspirational consumers who are looking to spread their feathers (flaunt their individualism and wealth) with what has become the ultimate self-expressive benefit brand: Apple

With China’s gift-giving culture, rapidly rising middle class, and regard for Apple as a luxury brand, most assume Apple has positioned Apple Watch Edition for China. What few realize, though, is that the product Apple has positioned most brilliantly for China is not Apple Watch Edition but Apple Watch. The explanation of why starts with this picture: 2897e8f977398fc04115f04781b66f71

When it was first posted on Weibo in 2013, this photo of a local bureaucrat with the Chinese Premiere rapidly went viral. Why? As highlighted, the local party official had a clear tan-line of a watch, but no watch. In the US, it might be odd to see a mayor with a watch tan-line, but it certainly wouldn’t go viral. So why did this picture? And what does that have to do with Apple?

Luxury Wristwatches: A Sign of Corruption

The story goes back to August 30th, 2012, when an accident in Yan’an killed 36 people. A Work Safety official was photographed smiling while at the scene. Outraged, internet users searched online about this individual and uncovered pictures of him wearing eleven different luxury wristwatches.Luxury watches Pictures of him, with his watches, went viral and earned him the nickname “Brother Wristwatch.” Internet users surmised that his salary was not sufficient to purchase these luxury watches and thus must have been obtained through corrupt means. He was arrested on charges of bribery and sentenced to 14 years in prison. Both before and after this individual was jailed, other Chinese officials have gotten in trouble for having extravagant wristwatches, so officials–like in the above picture–started removing their watches before public events. Chinese internet users took this as evidence of corruption and searched until they found pictures of those same officials wearing luxury watches. Whether legitimate or not, expensive watches on politicians and leaders has slowly become a sign of corruption to many Chinese. When Xi Jinping became president in 2012, he determined to root out this corruption, taking down anyone corrupt, whether “tigers and flies“–both national leaders and local bureaucrats. His campaign has had widespread effects: in just one province, by official statistics, over 15,000 party members were investigated for “disciplinary violations.” The effect on China–both in the public and in the private sector–has been palpable. Giving of luxury gifts–particularly watches–has long been a means of establishing one’s relationship and currying favor in China, but the anti-corruption drive has hit this market hard. In 2013, Swiss watch exports to China were down a shocking 26%, even though they had grown every year for the previous ten years. Gift-giving dropped 25% in 2013 and another 5% in 2014. The entire luxury goods market, which had grown at a rate of 43% as recently as 2011, dropped to 18% growth in 2013 and contracted in 2014 for the first since 2000. I have witnessed firsthand how private businesses have ended large parties and bonuses out of fear of appearing to be corrupt. The effect of the corruption crackdown has been dramatic, and it is still underway.

Apple’s Pricing Strategy

What does all this have to do with Apple Watch? This is the political and social environment in which the gold Apple Watch Edition enters China. Luxury watches are worn in China as a display of one’s wealth, but right now displaying wealth on one’s wrist is dangerous and, legitimately or not, is taken as a sign of corruption. The gold Apple Watch will sell,  but I would wager an Apple Watch Edition that it won’t be seen on the wrists of government officials or successful business people with political connections (which is most successful business people)–or, if it is seen, that person will quickly be sanctioned or even sacked. This, then, is why Apple’s positioning of Apple Watch is so brilliant: by releasing Apple Watch Edition at the luxury price of RMB 74,800 ($12,062),1 the “normal” Apple Watch seems downright frugal at RMB 4,188 ($675). Even the most expensive Apple Watch (RMB 8,288; $1336) looks cheap in comparison to the most expensive Apple Watch Edition (RMB 112,800; $18,190). By pricing one collection so high, Apple has managed to make Apple Watch seem downright moderate2–even though it costs 15-30% of the average Chinese annual salary!3 Wearing a gold watch on your wrist suggests lavish extravagance and might bring an investigation, but wearing a stainless steel watch will appear measured and moderate even as it is functionally identical: it is nice, but not flashy; luxurious, but not excessive. In a culture that values moderation and “the middle way,” individuals who choose a moderate Apple Watch will be praised, not investigated. Based on this, I also predict that Apple Watch will be one of the most-gifted items of this next year. Already, Apple is the number one luxury brand for gift-giving, in large part because iPhone is a highly desirable but not-extravagant luxury gift. Wearing a luxury watch brings unwanted attention, but using a gold iPhone does not. In light of China’s culture’s value on giving wristwatches as gifts, Apple’s status as a luxury brand, and the anti-extravagance socio-political climate, Apple has brilliantly positioned Apple Watch to be a smashing success in China.

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1. All currency conversions done by March 31, 2015 exchange rate.

2. Apple also managed to avoid the 20% consumption tax on luxury watches which kicks in at RMB 10,000.

3. Based on official statistics from 2012. I was unable to find more recent official statistics; if you do, please let me know.

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