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iPhones Produced in China Smuggled Right Back in

Posted by samzenpus on from the the-iphone-cycle dept.

Ponca City, We Love You writes "Factories in China produce iPhones that are exported to the United States and Europe and then smuggled right back in helping explain why Apple says it sold about 3.7 million iPhones last year while only 2.3 million are actually registered in the United States and Europe. For Apple, the booming overseas market for iPhones is a sign of its marketing prowess but also a blow to Apple's business model, costing the company as much as $1 billion over the next three years, according to some analysts. Since negotiations between Apple and China Mobile, the world's biggest mobile-phone service operator with more than 350 million subscribers, broke down last month, the official release of the iPhone in China has been stalled producing a thriving gray market. Copycat models are another possible threat to Apple in China. Not long after the iPhone was released, research and development teams in China were taking it apart, trying to copy or steal the design and software for use in iPhone knockoffs, or iClones and some people who have used the clones say they are sophisticated and have many functions that mimic the iPhone. "A lot of people here want to get an iPhone," says Shanghai lawyer Conlyn Chan."

6 of 159 comments (clear)

  1. Isn't that theft? by MouseR · · Score: 3, Interesting

    Someone needs to explain how distribution channels can legally divert these phones away.

    Apple is the only producer of these phones (well, through OEM partners), wich presumably moves the phones to some Apple warehouses and they, in turn, are moved off to Apple stores and authorised resellers (AT&T, Orange, T-Mobile and O2 if I'm not mistaking).

    So, where do all the grey market phones come from? And how can Apple account for them if they've never been in their warehouses?

    Mine was bought in an Apple store so I'm not even worried about it but I wonder about those I see in downtown Montreal cell phone outlets (at a premium price). Should those be considered stolen devices?

    1. Re:Isn't that theft? by LynnwoodRooster · · Score: 5, Interesting
      I've been working with and in China for 10 years now, this is how it works...

      Company A from America contracts with Company C in China to build product I.

      Company A orders 100,000 I's every month.

      Company C builds 120,000 I's every month.

      Company C ships 100,000 I's to company A.

      Company C sells the other 20,000 I's domestically at a higher profit.

      Happens all the time. That's how most IP/knockoffs in China come about. Same product line, same product, they just build a few extra (at their cost, their customers know what the BOM is, and can quickly figure out overcharges) and sell them locally for more profit.

      The key to keeping IP "protected" in China is to partner with a strong Chinese manufacturer and give them financial incentives to police the market for you. It's what I do with my IP; I have two "blessed" factories in China authorized to build with it, and they get to maintain that "blessed" status as long as:

      1. The products they build meet quality standards
      2. The products they build meet typical BOM and profit margin costs
      3. They monitor and police the Chinese market for me to watch for knock-offs

      The carrot? They get a virtual "lock in" of clients. They get to charge a few percent more profit because my IP carries a premium.

      The stick? They would lose the lock in, and either lose their "blessed" status or end up having two, three, or a dozen more factories so blessed and then lose their premium profit.

      The key to China is pretty simple - make it worth their while to do the policing for you. It's all about the RMB, folks...

      --
      Browsing at +1 - no ACs, I ignore their posts. So refreshing!
    2. Re:Isn't that theft? by LynnwoodRooster · · Score: 3, Interesting
      Based upon the number of iPhones available for sale in Shanghai, Nanjing, and Beijing I'm pretty sure there's a lot of extra production going on...

      Restricting a component is a good approach, as long as you can guarantee restriction of that component. You know the back-channels of China, though! A cousin of the senior engineer happens to work at that component vendor and over dinner at the New Year's celebration a deal is struck...

      Personally, I've found it better to control on deliveries to the destination market (usually the US and the EU), and incentivise the Chinese factory strong enough that they make the same amount of money AND don't have the headaches of extra production to just play ball from day one.

      BTW, for those others reading this little piece of lint (that is what a small, sub-thread is, right?) the problem is bad in China, but about 5X worse in India, based upon my experiences (consumer electronics products).

      --
      Browsing at +1 - no ACs, I ignore their posts. So refreshing!
  2. Having worked with apple since the late 80s by GlobalColding · · Score: 5, Interesting

    Apple always known about the gray market, Apple always supported the gray market, Apple always whined about the gray market. The truth is they always wanted and needed all the incremental revenue they could get. On the front end I remember them going out to the gray resellers and collecting serial numbers swearing they will get to the bottom of their source. On the back end they continued to pump millions of MDF dollars into known gray resellers to subsidise their low margins and to encourage them to keep up the volume. With the dollar being low and economy sucking eggs at home they are happy to offload as many units overseas with or without subscriptions. This gets rid of inventories that they will eventually have to price-protect at disti or super-retailer levels, and frees up purchasers to buy the new better/bigger products. The Spice Must Flow.

  3. Another piece of purposedly planted misinformation by LanceUppercut · · Score: 4, Interesting

    There's never been any negotiations between Apple and China Mobile. Needless to say, they have never broken down, since there was nothing to break down.

    Both lies were nothing more than another drops in the long stream of manipulative misinformation about Apple concocted by stock market criminals. Steve Jobs clearly debunked these rumors, but apparently, after waiting for a short while, the criminals are trying to milk this cow again.

  4. Re:failed projections and "costs" by Shados · · Score: 3, Interesting

    I live in north america. The only stopping most people of doing anything is the fear of getting caught. If there isn't a fear of getting caught, things automatically become "right", or even MORE than right, because they are "sticking it to the man".

    The only question I have for you is the following: You said you lived in an underdeveloped country. Is it illegal in your country to pirate US-made stuff? I Don't live in the US myself, so I sure as hell don't follow US laws. I follow my country's laws (which however, support copyrights), and thats it. If tomorrow the law says that copyright is null and void, I'll only buy videogames (because I'm a collector), but movies will all get pirated, and software will be free (and as a software developer, I'll change job!).

    Personally though, when I was young, my family could barely afford food (if that). If we couldn't afford something, we didn't buy it. Simple as that. Didn't go and get a bootleg. Sure, it meant I spent most of my life with no computer, no videogame, no nothing, but Im still alive.

    (I'd make exception to that on softwares and tools that would help someone get OUT of poverty. Entertainment is one thing.... education and such, I feel is a RIGHT, not a priviledge, like games are.). Besides, if pirating tools and software get you rich, then you'll have money to buy them later :)