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In China, once-thriving Apple scalpers are struggling

Smugglers and unofficial resellers of iPhones prospered when supplies were tight, but now, with the smartphone in abundance, they find fewer takers and lower profits.

March 14, 2012|By David Pierson, Los Angeles Times
  • A policeman, center, at an Apple store in Beijing tries to disperse a crowd angry over an iPhone 4S shortage in January.
A policeman, center, at an Apple store in Beijing tries to disperse a crowd… (Andy Wong, Associated Press )

Reporting from Beijing — Brusque with a 2-day-old stubble and a cigarette dangling from his lip, Zhao Xin is the last guy you'd want waiting on you at the Apple store Genius Bar. But if you need to get your hands on a genuine iPhone immediately, Zhao is your man.

Skimpy supplies of the Apple Inc. smartphone gave rise to scalpers like Zhao who prowl the perimeter of the company's flagship store here touting their wares to anyone within earshot. By hoarding and smuggling in the devices, they satisfied an unmet demand and charged a premium. Last November, an iPhone 4S from Hong Kong could have fetched $2,000.

No more.

With Apple boosting iPhone stock online and partnering with more local mobile carriers and retailers, Zhao and his cohorts are now in liquidation mode. Customers leaving the Apple store are stopped and offered the phone at face value. Zhao will now even sweeten the deal by throwing in a screen guard for free.

"I'd like to charge more, but no one wants to buy them," he said. "I can't make a profit."

China, long thought of as the manufacturing hub for iPhones, iPads and MacBooks, is now the Cupertino, Calif., tech giant's most promising new market. Apple's revenue here soared to $13 billion last year, up from $3 billion in 2010.

But the company's expansion is dealing a blow to a unique part of China's Apple experience: a thriving underground system of smugglers and unofficial resellers who had unwittingly become key players in the brand's still-growing distribution network.

The revelation last year of fake Apple stores was owed, in no small part, to the company's inability to satisfy demand for its products — which are still prized by many Chinese for the status they convey even though they cost 20% more in China than in the U.S. because of taxes.

The so-called gray market phenomenon started more than five years ago, when enterprising dealers, recognizing a void, began flooding China with iPhones carried in from Hong Kong and the U.S., switching the language settings and jury-rigging them for local mobile networks.

An estimated 1.5 million of these gray-market Apple handsets existed in China before the company officially unveiled the iPhone here in 2009. Smugglers are still getting stopped at the border with Hong Kong, sometimes trying to sneak the devices in with baby strollers. One man was caught last month with 30 iPhones taped to his waist and ankles. Customs officials reportedly became suspicious when the man had trouble bending down to pick up his suitcase.

But unauthorized dealers have shifted to hoarding supplies of the made-for-China models, which are easier to activate and come with valid warranties. Scalpers bought as many of the devices as they could online and at Apple's five official stores in Shanghai and Beijing — some of the busiest and most profitable Apple stores in the world, according to the company.

"The tighter supply is, the more scalpers can charge," said Kevin Wang, director of China research at ISuppli Corp., who estimates that the number of gray-market iPhones sold in China has declined from as many as 4 million in 2010 to 2 million last year.

Apple tried cracking down on arbitrage sales by limiting purchases to two iPhones per person. Scalpers responded by hiring runners to line up for them and buy more phones.

The back-and-forth came to a head at the launch of the iPhone 4S in January, when gangs of scalpers pelted Apple's Beijing flagship store with eggs and nearly rioted when they learned that sales of the new handset had been halted.

Even today, the sight of roving scalpers strikes a sharp contrast with the blue-shirted Apple sales staff inside the flagship Apple store in one of Beijing's trendiest malls.

The men — mostly young, uniformly dressed in black and sporting crew cuts — exhibit the faint menace of soccer hooligans roving in packs. Apple security guards spend much of their day telling them to stand several feet clear of the store.

"They have no right to tell us to leave," said Fu Chang, a scalper from northeastern China, who was offering both local and overseas versions of the iPhone and iPad to well-heeled shoppers passing through. Many ignored him as if he were a drunk indigent.

"I would never trust a scalper," said Jack Zhou, an owner of both an iPhone 4 and 4S he purchased through authorized dealers. "What if there was something wrong with the phone? There's no receipt."

Although unofficial sales still pad Apple revenues, the company worries they sully the brand experience and diminish the likelihood that users will sign service contracts and download apps.

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