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In China, a Glut of Black Market iPhones and a Glum New Reality for Apple

In China, a Glut of Black-Market iPhones and a Glum New Reality for Apple

By Paul Mozur and Shanshan Wang, The New York Times | Updated: 29 September 2014 10:03 IST

When Apple's latest iPhones went on sale this month in Hong Kong, Singapore and New York, among the hip urbanites and tech-obsessed was another group clamoring for the devices: Chinese scalpers looking to make a premium by flipping the phones to smugglers.

But the gray market for the new iPhones has already dried up, even though they will not officially go on sale in China for a few weeks, at the earliest.

Wholesalers who helped orchestrate the smuggling of tens of thousands of the phones into the country are now slashing prices to move inventory. At an electronics market in central Beijing, one retailer was recently selling the low-end iPhone 6 and iPhone 6 Plus for 6,500 renminbi to 8,800 renminbi ($1,060 to $1,436), down from 12,000 renminbi to 15,000 renminbi ($1,960 to $2,450) just after the release.

"Stocks of the iPhone 6 are way too high right now," said one wholesaler of smuggled iPhones in Beijing's northwestern tech hub Zhongguancun.

The smugglers' experience represents the new reality for Apple in China.

Four years ago, the iPhone 4 was a status symbol, with the black market booming before the product was officially introduced. Today, the iPhone is simply one option among many, as local companies like Xiaomi and Meizu Technology rival Apple in terms of coolness while charging less than half the price.

A spokeswoman for Apple declined to comment on the smuggling.

The primary route the iPhones have taken into China is via Hong Kong, according to the wholesaler, who declined to be identified because of the illegality of some parts of the operations. Scalpers organize Hong Kong customers with local identity cards to preorder phones that the scalpers then collect outside the store, paying about $325 extra per phone. The phones are then smuggled to wholesalers in the southern Chinese city of Guangdong, across the border from Hong Kong, and from there are shipped to cities across China.

When the prices were high, early last week, the wholesaler said he was making more than $163 per sale. But his profit margins have dissolved as prices have fallen.

"This year, the scalpers' losses will be big," he said.

China represents a major, fast-growing market for Apple, which competes with Samsung for control of the high-end smartphone segment. In January, Apple brokered a long-delayed deal with the country's largest telecom company, China Mobile, which has helped bolster sales. The largest smartphone market in the world, China accounted for 15.9 percent of Apple's revenue in the last quarter.

The new models will help Apple solidify its position in the country. In China there are about 50 million iPhone users, according to Kitty Fok, a managing director of the research firm IDC. She estimates that the company will sell about 4 million phones a month as customers swap their old iPhones for the new ones.

But both Apple and Samsung face stiff competition from local brands, which have been offering cheaper phones with high-end features. As Samsung's sales slipped this year, the company was replaced by Xiaomi as the country's largest smartphone maker, according to the market research firm Canalys.

"The local players aren't only playing the price game," Fok said. "They have products that cater to the local market, big screen sizes, optimized connectivity for China and dual SIM cards."

The Chinese government is not making things any easier. An intensifying crackdown on corruption in the country has led officials, who in the past were known to spend big on luxury products like iPhones, to tamp down on lavish purchases.

The government has also signaled that it would take measures to curb government reliance on electronics made by foreign companies after disclosures by the former National Security Agency contractor Edward J. Snowden about U.S. government surveillance. In a statement issued this month, Apple's chief executive, Timothy D. Cook, said the company had never cooperated with the government of any country to provide access to customer data.

At a conference this month, Wei Jianguo, director general of the China Center for International Economic Exchanges, said the Shanghai government had told its employees to use Huawei phones instead of phones produced by Apple or Samsung, according to a transcript posted on the news portal Sohu, one of the sponsors of the event.

Three government officials in Shanghai and Beijing said they had not heard about any formal notice to stop using foreign phones and said many in their departments still used iPhones. One of the officials in Beijing, however, said that people in his office refrained from bringing in Apple computers or iPads, because they are a more conspicuous display of wealth.

Out of the gate, Apple is already a step behind with the iPhone 6. Last year, the company released the latest model in China at the same time it did in the United States, Japan and parts of Europe. This year, the release has been delayed as Apple awaits government approval, an often slow and unpredictable process.

The iPhone 6 is likely to get the final license before China's National Day celebrations Wednesday, according to a person with knowledge of the plans who works for one of China's state-owned telecom providers. If that happens, the new models will most likely begin selling in China a few weeks later.

The delay gives the smugglers a bit more time to get rid of their stock.

The recent scene at the electronics market in Beijing - a multistory mall crowded with stalls of vendors selling everything from calculators and hard drives to surveillance cameras and smartphones - was not encouraging. Only a few customers browsed in the narrow walkways.

No stalls openly displayed the new iPhones. On request, the vendors could procure the devices from a wholesaler. One vendor said the market for the phones was far worse than in past years but said he hoped a new crackdown on smuggling by customs officers would help push their price back up.

In recent days, Hong Kong's marine police have played a cat-and-mouse game with smugglers who use speedboats to take iPhones into China. On Thursday night, the police ran off several men in a mangrove swamp loading boxes of iPhones into a flat wooden boat that would ferry them out to a nearby speedboat. They seized 286 iPhones, according to a statement from Hong Kong customs. In other instances, customs has found hundreds of phones concealed in the axles of trucks and in hidden compartments in cars.

A report from China's state-run Xinhua news service said the government would auction off 2,000 iPhone 6s it had seized in the southern city of Shenzhen.

The vendor at the electronics market said that one way smugglers skirted the stricter enforcement was to walk the phones across the border two at a time. Usually those crossing the border take the phones out of the packaging to convince customs officials that the phones are their own, he said.

Tearing off the plastic on what appeared to be an unopened iPhone 6, he showed how the screen was already dotted with the fingerprints of whoever brought it into China.

"Right now at our market you won't find a phone that is actually in its original packaging," he said.

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