The highly anticipated launch of the iPhone 5 in China, the second largest market for Apple, was deemed successful by many accounts, but still failed to halt the progress of Lenovo, arguably the most valuable technology company in the world.

The newest Apple iPhone, which has a bigger four-inch screen and 4G support, was released in the United States and 30 other countries last September, when the company sold more than 5 million devices in the first three days. Apple sold more than 2 million units of the iPhone 5 in China in the first three days of sales in the country, the highest debut Apple’s seen in the Chinese smartphone market.

“Customer response to the iPhone 5 in China has been incredible, setting a new record with the best first weekend sales ever in China,” said Tim Cook, Apple’s CEO. “China is a very important market for us and customers there cannot wait to get their hands on Apple products.”

Unprecedented competition

Shares of Apple, however, have declined steadily since September by increasing uncertainty about the company’s ability to cope with unprecedented competition. This year saw strong sales of cheaper Kindle Fire devices from Amazon, while Microsoft held its own with its first foray in the tablet market with its Surface device.  Amazon and Microsoft are tackling Apple’s tablet market from both ends of the consumer and enterprise spaces.  Add to this, Android-based devices continue to dent Apple’s mobile market share.

China in particular is the fastest growing market for Apple, and is where the company generates about 15 percent of total revenues. But Apple lacks the local marketing campaign and brand positioning in the China market, where consumers would rather compromise quality over cost.  More smartphones are selling at about 1,000 yuan ($160), which will get you most of the top features found in higher-end smartphones, including more powerful processors, better cameras and larger screens.

For many countries, Apple and Samsung products have captured the majority of mobile device market share. A lot of people buy mobile gadgets, but for the highly saturated Chinese market, Apple and Samsung products are often the stalemates.

Lenovo takes a stand

Local leaders have fared better, including Lenovo, who’s currently experiencing strong growth in the PC industry.  Lenovo’s risen to top rank in the PC market at the end of 2012 year, and is a strong potential threat to global leaders like HP and Dell in the coming years. With its success in the PC market, the Chinese company begins to seriously look at other sectors, notably that of smartphones and tablets.

In a relatively short period of time, Lenovo has captured 14.8% of the smartphone market in China, and this is only 1.9% less than Samsung, and 6.9% more than Apple. According to research from Gartner, by 2013, Lenovo has the potential to become the largest producer of smartphones in China. The third-quarter smartphone sales in 2012 were 18 times as high as a year earlier, reflecting the strong market demand in China.

Lenovo is the only local smartphone player that can compete with global top brands in China, thanks to its household brand recognition, nationwide distribution, strong portfolio and reasonable pricing.

The main reason for this success lies in Lenovo’s well-placed marketing campaigns, and brand positioning in the primary and secondary price ranges. Lenovo had a huge second-quarter in 2012 due to increased volumes through operators, and a continued push into retail, leveraging on its PC retail stores and partnerships.

“Lenovo’s strength is that its China PC business is a cash cow that can fund the cost of its smartphone expansion,” said Barclays managing director Kirk Yang.

Lenovo going global, full steam ahead

The company is also expanding its mobile business outside China India, Indonesia, Vietnam, the Philippines and Russia.

“We have a very long-term view on our smartphone business,” said Lenovo spokesman Jeff Shafer. “Once the company grabs a market share of more than 10%, it gains bargaining power with component suppliers and carriers, reducing costs and generating consistent earnings, he said. Any smartphone profit earned in China could help fund growth elsewhere,” he said.

Lenovo held a 3.7% share of global smartphone market the third-quarter of 2012, up from 0.37% a year earlier, partly because of its rapid growth in China, according to research firm IDC.

“We are very determined to offer many different products, a wide range of choice that covers everything, not just high-end or low-end smartphones, but also in the middle,” said Milko van Duijl, Lenovo’s president for Asia-Pacific and Latin America.

The company is also spending 5 billion yuan ($793 million) to set up a research and development plant and to produce mobile devices. The plant will have sales of 10 billion yuan by 2014, quintupling to 50 billion yuan in five years.

Apple’s market strategy

According to market researcher IDC, China will overtake the US as the largest market for smartphones this year, with shipments expected to increase 52 percent to 137 million.

China Mobile Ltd with a mobile users’ base of 693 million subscribers (more than the combined populations of the U.S., Japan and Brazil) aren’t selling iPhones. Apple tried to make a deal earlier this year when Cook visited China, but that deal didn’t materialize.

A deal with China’s largest telephone operator is considered crucial to improve the distribution of Apple products in a market of 693 million users and is expected to increase to double next year.

Lenovo intends to develop products based on local sentiment. For Apple to succeed, it needs to produce a range of compatible devices, from high-functioning smart TVs to smartphones, priced to compete in emerging markets.

“I don’t think every Chinese can afford $400 to $500 for a smartphone or tablet, but we will develop the appropriate product for those customers. That will be Lenovo’s advantage,” said Chief Executive Officer Yang Yuanqing, Lenovo.

Lenovo’s 16 gigabyte version of ideatab S2007A with 3G service cost about 2,499 yuan; whereas Apple’s newest iPad with 3G service costs 4,688 yuan at Apple’s online store in China.

Apple is weak in emerging markets, and in China with products tightly targeted and supported according to the economics of the market, Apple is faced with a string of obstacles to beat local players. For instance, rather than trying to sell a very expensive product like the fifth generation iPhone in markets where most can’t afford it, Apple can crafted less expensive products that will do far better.  This would be a departure for Apple’s strategy until now, but it may be a necessary consideration as Apple looks to dominate the consumer gadget experience with both hardware and software-defined services for the everyday user.