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Early China iPhone launch gives smugglers a run for their money

A woman tries the silver colored version of the new iPhone 5S after Apple Inc's media event in Cupertino, California September 10, 2013. REU
A woman tries the silver colored version of the new iPhone 5S after Apple Inc's media event in Cupertino, California September 10, 2013. REU

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)

(Editing by Alex Richardson)

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