Smuggled IPads Set to Flood China as Sales Start in Hong Kong

For Wang Pingdao, each day Apple Inc. waits to introduce its latest gadgets in China means extra profit from selling imported iPhones and iPads in Beijing.

“The iPad is selling pretty well now,” said Wang, a salesman at the Xing Kongjian Digital Market store in Beijing, who has been getting the devices from the U.S.

Wang’s business may be about to boom. As Apple begins selling the iPad in Hong Kong today and the iPhone 4 next week, the former British colony will be an important source of supplies of Apple products feeding the so-called gray market in China, said Flora Wu, a handset analyst at BDA China Ltd.

Dealers such as Wang account for almost half of the iPhones sold in China, according to BDA, underscoring how the world’s most valuable technology company has lagged behind Nokia Oyj and Lenovo Group Ltd. in marketing its products in the world’s third- largest economy. Wang plans to sell the low-end version of the iPad for 4,300 yuan ($634) each after buying them in Hong Kong for HK$3,888 ($500).

“It’s something they need to address at some point and now is probably the time,” said Bertram Lai, head of research at CIMB-GK Securities in Hong Kong. “They need to get it sorted out.”

Gray market iPhone sales in China exceeded 400,000 during the first half of the year, compared with the 500,000 sold by China Unicom (Hong Kong) Ltd., the only carrier authorized to offer the device in the country, BDA’s Wu said. Chinese dealers also buy from the U.S. and Europe, she said.

Difficult to Track

Apple, which is expanding iPad sales to Hong Kong, Austria, Belgium, Ireland, Luxembourg, Mexico, the Netherlands, New Zealand and Singapore today, hasn’t set a date for the debut of the tablet computer or the iPhone 4 in China, spokeswoman Jill Tan said. Gray market sales of Apple products in China are difficult to track, she said.

Hong Kong operates as a semi-autonomous region of China, with its own laws and government, under the “one country, two systems” formula agreed when the U.K. returned the city to Chinese rule in 1997.

Globally, Apple may ship 12.9 million iPads this year, according to estimates by ISuppli Corp. this week. The research firm raised its projections by more than 80 percent after the product sold out in U.S. stores.

Gray market demand may be pushing up sales in Hong Kong. IPhone shipments jumped almost 10-fold during the first three months of the year, according to IDC. Kathy Sin, a Hong Kong- based analyst at the research firm, said she “can’t rule out” sales were boosted by demand from China.

Slow in China

“Apple isn’t focusing very heavily on China and the company is still building its sales channels and partnerships, so it’s been slow to launch the latest products,” said Sandy Shen, an analyst at Gartner Inc. in Shanghai.

By comparison, Nokia’s retail network in China comprises more than 100,000 stores, while Lenovo has more than 10,000 in the country, according to spokespeople at the companies.

Delays boost the fortunes of vendors such as Zhang Changlong, who sells some iPhones at Zongda Electron Catena in Dinghao Electronic Mall in Beijing for as much as 13,000 yuan.

IPhones from Hong Kong stores are more popular in China than those originating from the U.S. because the ones from the neighboring city are unlocked and able to use any phone carrier’s service, said Pan Yayun, a salesman at the Chuangyeweilong Store in Beijing. Hong Kong models, which can fetch an extra 1,000 yuan each, are also easier to update and more user-friendly for mainland consumers, he said.

Second Store

Apple this month opened its second store in China to expand its retail network. The outlet in Shanghai will be followed by “many” more for the country, the company said on July 8. The first store opened in Beijing in July 2008.

Gray market sales don’t necessarily dry up when Apple enters China because the unauthorized versions can still be cheaper, Gartner’s Shen said. For instance, China Unicom offers the iPhone 3GS for 6,999 yuan each, or about 28 percent more than those sold in Hong Kong, and triple the price of the ones available through a contract with AT&T Inc. in the U.S.

The price difference between iPhones in China and Hong Kong is partly due to import duties, Unicom President Lu Yimin said in March.

Smugglers dodging taxes of 50,000 yuan or more do so at the risk of being charged with a criminal offence and up to life imprisonment if the amounts exceed 500,000 yuan, said He Fang, a Shanghai-based lawyer at Rouse & Co. International.

Authorities haven’t seriously tackled the smuggling of Apple’s products into China because volumes are still small, Gartner’s Shen said. Apple’s Tan declined to say if the company is taking any action to prevent such activities.

“Since the iPhone 4 first appeared a month ago, I have sold more than 20 locked models and 30 unlocked ones,” said Jianwei Yang, who sells iPhones at booth 2008C in Hailong Electric Mall in Beijing. “Over 90 percent of buyers are from government authorities or companies that buy them in groups.”

--Penny Peng, Miao Han, Debra Mao. Editor: Young-Sam Cho, Anand Krishnamoorthy, Jonathan Annells

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

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