Fake Apple Stores Crop Up on China Demand

Chinese authorities shut two unauthorized Apple Inc. (AAPL) stores in Kunming for operating without business licenses, a newspaper run by the southwestern city’s government reported.

Investigators also examined three other stores that used Apple’s logo without the company’s permission, though they were found to have operating permits, according to the Dushi Shibao newspaper report posted today on the Kunming government’s website. The findings were part of a probe into more than 300 electronics vendors in the city, according to the report.

The move comes about a week after the “BirdAbroad” blog began posting photographs of a fake Apple store complete with an acrylic staircase and crew of blue-shirted sales staff, showing the extent some dealers will go to profit from booming demand for iPhones and iPads. The company’s network of more than 900 retail outlets has failed to keep up with demand, forcing customers to buy from vendors not sanctioned by Apple.

“In areas outside of the biggest cities, it’s difficult to find Apple products, and there is strong demand,” said Jim Tang, a technology analyst at Shenyin & Wanguo Securities Co. in Shanghai. “For a big country like China, Apple’s sales network doesn’t go far enough, and the company needs to expand.”

Photographer: ChinaFotoPress/Getty Images

The fake 'Apple Store' is shown on July 21, 2011 in Kunming, Yunnan Province of China. Close

The fake 'Apple Store' is shown on July 21, 2011 in Kunming, Yunnan Province of China.

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Photographer: ChinaFotoPress/Getty Images

The fake 'Apple Store' is shown on July 21, 2011 in Kunming, Yunnan Province of China.

The city government hasn’t received any requests from Apple on the matter, and the company declined to comment on the findings, according to the report.

‘Doing Apple a Favor’

Yu Cheng, who owns three stores selling authentic Apple products in Kunming without the company’s permission, isn’t violating any Chinese laws and is actually “doing Apple a favor,” Deng Hai, a lawyer with the Sichuan Law Offices representing the businessman, said in an interview. Yu’s stores haven’t been ordered to shut, Deng said.

Yu, who wants to become a legitimate part of the Cupertino, California-based company’s network, has applied for permission to use the Apple logo and sell the company’s products, Deng said. Carolyn Wu, a Beijing-based spokeswoman for Apple, declined to comment on Yu and his stores.

Xinhua News Agency, citing an unidentified worker at the municipal industrial and commercial department, reported July 23 that Kunming officials had started inspecting local electronics shops. Inspectors will examine business licenses, permits authorizing brand use and purchasing channels, the official news service reported.

‘Negative Impact’

“The authorities should stop these fake stores from operating and selling whatever they want,” said Xie Yonglin, an employee at Nanfang Yuan, one of Kunming’s authorized Apple sales agents. The unauthorized stores “have a negative impact on our products and brands.”

Apple operates four stores in China, all in Beijing and Shanghai, and has more than 900 authorized sales agents. It also has a distribution agreement with carrier partner China Unicom (Hong Kong) Ltd. Apple’s stores in Beijing and Shanghai generate, on average, the company’s highest traffic and revenue, Chief Financial Officer Peter Oppenheimer said in January.

Still, the lack of stores is driving some Chinese consumers to unauthorized sellers. Only 53 percent of the 1.07 million Apple iPads sold in China last quarter were through vendors sanctioned by Apple, according to research firm Analysys International.

“The Chinese are suckers for iPhones and iPads, just like everybody else,” said Paul French, founder of Shanghai-based market research company Access Asia. “Apple should police their supply chain a bit better.”

Passing Lenovo

By comparison, Lenovo Group Ltd. (992), China’s biggest personal- computer maker, said last year it has more than 10,000 outlets in the country, and Nokia said it had more than 100,000 sales points.

A smaller distribution network hasn’t hindered demand for Apple’s products. The U.S. company’s revenue in China, Taiwan and Hong Kong climbed six times to $3.8 billion in the quarter ended June 25, Chief Operating Officer Tim Cook said last week. Apple’s sales last quarter for the region may have surpassed Lenovo’s for the first time in at least a decade, according to four analysts surveyed by Bloomberg News.

Yu opened two stores in Kunming in June and another this month. New hires have four days of training on how to make the outlets look and feel like an Apple store, said a manager at the Wu Cheng Road shop, who only identified himself by his surname, He.

‘Simple’ to Copy

On the morning of July 23, a group of five new employees took notes as He showed them how to angle signs on a large wooden table as they would be at an Apple store.

“An Apple store is one of the easiest stores to do; that’s the genius of it,” French said. “It’s so simple. It’s just like a school chemistry lab.”

Yu’s stores buy iPhones, iPads and iPods from authorized dealers and sell them at the same prices listed on Apple’s website, said He, the manager at the Wu Cheng Road shop. Margins are low, he said.

Nanfang Yuan, the authorized Apple reseller, operates a stall with fewer than half-a-dozen counters displaying products inside a larger mall that specializes in electronics.

Yu’s largest outlet is a two-floor, stand-alone store on Zhengyi Road, Kunming’s busiest shopping area, near shops selling Calvin Klein Inc. and Nike Inc. (NKE) products.

‘Right to Invest’

Yu has “the right to invest in as many stores as he wants, as long as he is not breaking the law,” Deng said. If the stores in Kunming are profitable, Yu may open similar outlets elsewhere, Deng said. Yu declined to be interviewed.

The Chinese market is a “substantial opportunity,” Cook said last week. The nation’s economy, the world’s second-biggest, grew 9.5 percent in the second quarter.

China is also one of 12 countries on the “priority watch list” of the U.S. Trade Representative, according to a May report on intellectual property rights. Apple didn’t open its first store in the nation until 2008.

“I don’t care if it’s authorized or not, as long as it’s the real product,” Li Yang, a 32-year-old employee of a local software company, said as she shopped at one of Yu’s stores. “I am a customer and I don’t want to wait until they open a store in Kunming.”

To contact the reporters on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net; Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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