Early China iPhone launch gives smugglers a run for their money

Early China iPhone launch gives smugglers a run for their money

Tue, Sep 10 2013

By Yimou Lee and Lee Chyen Yee

HONG KONG (Reuters) – Apple Inc’s millions of Chinese fans will celebrate the near-simultaneous launch of the latest iPhone in China and the United States, but one group will have little to cheer – the smugglers. An early launch of Apple’s latest smartphone in China is expected to stifle a thriving grey market worth billions of dollars a year built around smuggling from Hong Kong, where in the past the U.S. tech giant’s gadgets have gone on sale months before they reach official channels in the mainland.Smugglers also worry that once Apple and China Mobile Ltd sign a long-awaited deal it will snatch away more business with the carrier’s heavily subsidized smartphones.

“Of course it will affect our business in some way. If people can buy it at the official stores soon, why will they still want to buy it here?” said Huang Kaidi, a shopkeeper in China’s southern city of Shenzhen, who has been selling iPhones smuggled from Hong Kong since the phone debuted in 2007.

“But price is still our advantage. Our price will still be cheaper and consumers are always looking for cheaper ones,” said Huang, one of the hundreds of shop owners squeezed in the dimly lit, smoke-filled electronics marketplace.

The unveiling of Apple’s latest phone this week comes as the company is grappling with falling sales in Greater China, its second-largest market, due to the narrowing technology gap with cheaper Chinese rivals and as Samsung Electronics Co Ltd keeps up a steady stream of new models across all price ranges.

When the iPhone 5 was launched last September, Chinese authorities only gave the green light for sales at Apple stores and authorized resellers in December, giving smugglers an advantage of several months to lure die-hard fans.

A weak Hong Kong dollar and virtual tax-free regime also helped create a lucrative arbitrage opportunity.

Roughly 70 percent of iPhones and iPads sold in Hong Kong, or $4-5 billion of Apple’s annual sales of $6-8 billion in the Chinese territory, land up in China via either the grey market or mainland tourists’ purchases, according to analysts.

BEIJING FIRST

This time, things will be different.

On Wednesday, for the first time, Apple is holding an event in Beijing hours after the U.S. unveiling of its latest iPhone, underscoring the importance of the Chinese market.

Two of Apple’s carrier partners – China Unicom and China Telecom – have already said they will carry the newest iPhone models within days of their launch.

China Mobile, the world’s biggest carrier by subscribers, is expected to seal a deal with Apple shortly after the launch, some industry executives said.

“Once China Mobile signs a contract with Apple, that will also take away some business from the grey market,” said Bryan Wang, an analyst with Forrester Research in Beijing.

While the early launch is seen hampering the smuggling trade, it won’t wipe it out totally.

“The market will not be fully diminished because a sizeable portion of consumers on the Chinese operators’ network will still want to buy a new phone themselves before their contract runs out,” Wang said.

Consumers on pre-paid tariffs will have to buy the phones without the operators’ subsidies if they cannot wait for their contract to run out.

So while the smugglers are losing out on the time advantage and price premiums, they are still taking no chances.

Laying the groundwork for Wednesday’s launch, an ad posted on Alibaba Group’s Taobao.com offered: “Hong Kong students to help you buy iPhone 5, 5S, 5C”, with the latest editions priced at 5,000-7,000 yuan ($820-$1,100) apiece.

Student “mules” from Hong Kong typically carry iPads in their schoolbags or strap iPhones around their waists and ankles each time they cross the border.

In Shenzhen, smugglers promise to have the new iPhones at their counters as soon as it is launched in Hong Kong.

“Come again on the day of the launch. I guarantee the goods will arrive from Hong Kong by early afternoon. In the meantime, why don’t you consider getting an iPhone 5? I’m selling them real cheap to get rid of my leftover stock,” said a Shenzhen shopkeeper surnamed Zhou, selling iPhone 5 models at a 25 percent discount. ($1 = 6.1210 Chinese yuan)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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