Smuggled iPhones Not Hot In China - InformationWeek

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11:20 AM

Smuggled iPhones Not Hot In China

Demand for iPhone 6 and 6 Plus devices smuggled into China slows dramatically, even as Apple prepares to start selling the devices there.

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The Apple iPhone 6 has yet to go on sale officially in China, but that's not stopping smugglers from selling the phones on city streets and in back alleys. Black market sellers looking to make a quick buck, however, may have already exhausted early demand for the device -- which doesn't bode well for Apple.

"The gray market for the new iPhones has already dried up," reports The New York Times. The NYT estimates tens of thousands of iPhone 6 and 6 Plus handsets have been smuggled into China from Australia, Hong Kong, Singapore, and New York City. The black market is essentially flooded. One reseller has been forced to slash street prices from $1,960-$2,450 down to $1,060-$1,436. The iPhones netted wholesalers about $163 per handset, but with so many phones available and demand way down, black market operators may instead lose money on their iPhone stock.

How did the phones get there?

When the iPhone 6 and 6 Plus went on sale in the US on September 19, videographer Casey Neistat cased some of the lines at Apple stores in Manhattan and found a large number of Chinese customers waiting to buy the new devices. He asked them what they intended to do with their new phones, and many suggested the new phones were for themselves or for loved ones.

Neistat didn't believe them. He produced a six-minute video titled "Black Market Takes Over the iPhone 6 Lines" that has earned 2.8 million views so far. The video suggests that most of the Chinese buyers waiting in line to buy iPhones on launch day were there to make some cash by reselling the phones, and that many were there as a result of organized smuggling rings run by the Chinese mafia. (For the record, I'd estimate 90% of the people waiting in line to buy the iPhone 6 and 6 Plus on September 19 where I purchased mine in New Jersey were also Chinese.)

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Analysts disagree with Neistat's base assumption that a large criminal organization led to the lines witnessed in big cities on September 19. Linda Sui, an analyst at Strategy Analytics, told TIME, "They need money. Most of them are low-income people." In her view, many Chinese iPhone buyers were there to grab a device and turn it around to someone else who intended to ship it to China and resell it there. "In Chinatown there are small circles, so many people know each other," said Sui.

In the US, new iPhones couldn't be resold for more than about $1,000, leaving the original purchaser with a profit of $300 to $400 per device. The buyer then arranged for the phones to make their way to mainland China. Most of the devices entered via Hong Kong, according to the NYT, and were then sent via internal routes to large cities throughout the country.

When the iPhone 5s went on sale last year, it launched in China the same day it launched in other cities around the world. That put a damper on iPhone smugglers. This year, the iPhone's launch in China has been delayed as Apple has secured only one of two needed licenses to sell the device there. The company expects to secure the second license in time to commence sales this week, giving smugglers precious little time to recoup their investment before the phone can be purchased in stores. The slackened demand, however, is troubling.

iPhones were the hot phone to have in China several years ago, but in-country hardware makers have changed that story. Phone manufacturers such as Huawei, Xiaomi, and Meizu have stepped in with competitive handsets that cost far less. Though Apple sells tens of millions of iPhones in China, sales of Android-based phones from Chinese competitors number in the hundreds of millions. It doesn't help that the Chinese government has decreed US-made products undesirable.

Apple hasn't yet said when the iPhone 6 and iPhone 6 Plus will launch in China, but analysts will be watching closely to see just how well Apple does in the world's largest market for mobile phones.

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Eric is a freelance writer for InformationWeek specializing in mobile technologies. View Full Bio

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User Rank: Ninja
9/29/2014 | 1:24:22 PM
Re: Status

This same trend can be seen in other third world countries, where phones aren't restricted to the carrier, and even more so, the local service provide actually encourage the black market because they're willing to activate any phone as long as they can support it.

For both Iphone and Samsung, and like any product that it's trending, black market smuggling will always exist.

User Rank: Ninja
9/29/2014 | 1:17:00 PM
Re: Did anyone do some basic fact checking?
Instead of ragging on IW for "fact checking", check your comment for common sense. Who cares where it is manufactured, any legit sale of Apple product gives profit to Apple and thus US taxes. That is China's intent, they are being dinks because US has cracked down on them for dumping and quality/safety issues on their products. China doesn't care where they are made.

Nothing in your comment contradicts what Eric said. It's good point you make about corruption crackdown but who really knows the effect of that on black market items over there. Those long lines make a lot more sense now.
User Rank: Strategist
9/29/2014 | 12:51:45 PM
Re: Status
Now that you bring it up... Recently I have come across ads for iPhone 6 "1 to 1 replica", which are obviously knock-offs, at about a quarter of the actual phone's price. If you see it as a status symbol, you wouldn't be quick to jump at this "bargain"-- unless you'll be showing it off only in pictures, because clearly it won't work or even look like an actual iPhone in person.
User Rank: Apprentice
9/29/2014 | 12:48:46 PM
Did anyone do some basic fact checking?
The article says 'It doesn't help that the Chinese government has decreed US-made products undesirable.'

There's no such thing as a US-made smartphone!  Motorola briefly tried it when it was owned by Google, but EVERY iPhone sold in both the US and China is made in China!

Furthermore, I witnessed the lines of Chinese buyers in Manhattan firsthand and while they definitely don't look to be associated with any organized crime syndicates, the buyers are NOT actually smuggling anything into China either.  I witnessed (and the Neistat video clearly shows) the buyers handing off the phones as soon as they leave the store.

The main reason iPhone demand has dropped is because of the recent government crackdown in China on corruption.  Conspicious consumption (displaying expensive phones, watches, cars, etc.) is considered an important marker of status in China but now it is also considered to be grounds for investigation if someone is one of the tens of millions of government employees in the country.

An article in a tech magazine should have some very basic fact checking done before it's published.
User Rank: Ninja
9/29/2014 | 12:45:17 PM
Grey markets, grey area
I was burned by grey market products once. After having picked up a stack of hard drives from a well known online retailer, a few of them failed and I found that neither my retailer warranty - which had as you might have expected, only just gone out of date - nor my manufacturer warranty were valid. The latter wasn't claimable since the product had been sold outside of its intended region, something I had no concept of at the time and wasn't aware of at the point of purchase.  

That particular company has cleaned up its act these days, but it's certainly something to watch out for and consider, especially if you know you're buying a product that's been shipped around. 
Lorna Garey
Lorna Garey,
User Rank: Author
9/29/2014 | 11:39:38 AM
It all comes down to a status symbol -- what is that little logo worth? And to people who value such things, presumably being one of the first to have the phone, before the unwashed masses, is key. So yeah, seems like Apple should be worried.
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