Op-Ed Commentary: Matthew J. Zito

SHANGHAI – There was good news and bad news for gamers in China this week as Microsoft announced that the Xbox One will be hitting the country’s shelves on September 23, after the lifting of a 14-year ban on gaming consoles. The domestic version of the Xbox will be manufactured in the Shanghai Free Trade Zone and come loaded with goodies to entice Chinese consumers, including a six-month subscription to Xbox Live Gold, an extended warranty, and eventually, “hundreds of thousands of hours” of localized content—created through a partnership between Microsoft and Tencent Holdings. Nearly 5,000 preorders have been placed on ecommerce site JD.com with still a month-and-a-half to go before delivery.

The downside? The console will cost almost twice what it does in the United States, with a price tag in China of RMB 3,699 (US$600) for the base model or RMB 4,299 (US$700) for the console plus Kinect add-on. These compare with prices of US$399 and US$499, respectively, in the United States. Adding insult to injury, in Hong Kong, the entry-level model will sell for only US$436. The overall cost to Microsoft of parts and manufacturing the Xbox has been estimated at US$396 and US$471 for the basic and Kinect models, respectively.

Microsoft’s announcement of such steep prices, the second highest after India (US$665 for the base model), set off waves of discontent among Chinese gamers. Industry watchers noted that with this move Microsoft has given itself an added obstacle for breaking into an already challenging market. Though China is the world’s third largest market for gaming, with revenues of US$14 billion in 2013, this is largely concentrated in computer and mobile gaming, owing to the long-standing ban on consoles. And thus far, sales of the Xbox One on China’s grey market have lagged behind those of the PlayStation 4, where the two consoles retail for around RMB 3,100 and RMB 2,700, respectively. To top it all off, there are worries that the domestic model Xbox won’t be compatible with games from other regions that haven’t passed through Chinese regulators for approval.

RELATED: Ban on Video Game Consoles Lifted in the Shanghai FTZ

The method to Microsoft’s apparent madness becomes clearer, however, when surveying the retail strategies of other high-end goods in China. For example, the Chinese mainland remains one of the more expensive places in the world to purchase an iPhone 5s (at $US868.14), and in the top ten most expensive by GDP per capita (around 9.6 percent), according to Mobile Unlocked. This has long contributed to a phenomena of Chinese consumers travelling to Hong Kong to buy iPhones—where they can be bought for the third lowest price globally (US$720.62) after the U.S. (US$707.41) and the U.A.E. (US$707.58).

There are several factors at play in the high cost of the iPhone in China. Firstly, domestic sales are subject to a 17 percent value-added tax, whereas smartphones bound for overseas markets can be exported duty-free. Secondly, Apple typically forbids carriers from discounting the price of buying the iPhone outright; this was said to be a factor in the long delay for China Mobile to sign on as a carrier of Apple products. Thirdly, as competition heats up in China among low-cost smartphone manufacturers like Xiaomi, Apple’s strategy has been to maintain its status as a premium good, even at the cost of lower unit sales.

Imported cars are another category of products notorious for high prices in China, particularly for luxury models. The markup on cars can range from 31.5 percent on a Mercedes-Benz standard E-class sedan to a staggering 69 percent on a BMW X5 luxury crossover SUV. Automakers typically fault China’s stringent tax policy, including a 25 percent import tax, 17 percent value-added tax and a consumption tax based on engine size.

This may be true, but auto companies have not exactly been eager to cut the best deals for Chinese consumers—profits are estimated to be 30 percent higher on the sale of imported cars in the country. The excesses of foreign automakers were recently exposed after Chinese regulators launched an investigation into monopolistic practices on the part of Jaguar Land Rover, Audi and Daimler. This was quickly followed by their successive announcements to cut retail prices on select models by around 19 percent.

In all three cases—game consoles, smartphones, and luxury cars—the story is more complex than just draconian taxation or unrestrained price-gouging. In any commodities market, there will always be a segment of the population willing to pay a premium for high-end goods. But in China, there are simply no viable domestic alternatives for certain classes of products. There is little demand for domestic luxury automobiles (except from the PLA), domestic smartphones are concentrated in the low-end market, and until the Xbox goes live in September, there is literally no legitimate market for gaming consoles in China. With no domestic competitors to pose a serious threat in terms of market share, is it any wonder that companies like Microsoft, Apple, and Mercedes-Benz have tested the limits of the Chinese wallet?

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira 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 China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email china@dezshira.com or visit www.dezshira.com.

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