Many bad apples

Understanding China’s ‘grey’ handset market

Many bad apples

Do good things really come to those who wait? Well, China Unicom is about to find out.

After two years of negotiations with Apple, Unicom announced last month that it will begin selling Apple’s popular iPhone, starting this Saturday (see WiC28).

Unicom – the country’s second largest cellular operator after China Mobile – made iPhone stocks available for pre-order earlier this month.

No official sales figures have been disclosed but analysts say initial demand was lukewarm at best.

Blame grey imports, perhaps. The iPhone is already widely available for sale at electronic stores in big cities and there are an estimated 2 million authentic (but unlocked) units already in use.

Sellers typically get the phones from suppliers who ship units from the US or courier them via airline passengers, says the New York Times.

But isn’t that illegal? Although unlocking of the phone violates Apple’s purchase agreement, buying and selling phones that are smuggled from abroad does not violate local laws, even though many stores may be avoiding import duties.

It is a serious problem for China Unicom, who offer service packages charging up to Rmb6,999 ($1,021) for a 16-gigabyte capacity iPhone 3GS.

But in the grey market, the same model – smuggled from Hong Kong – sells for only Rmb5,450.

Grey-market iPhones also have WiFi, a function that has been disabled in Unicom’s iPhones, as Beijing is yet to approved handsets with the feature.

That brings into question whether the iPhone will prove as effective as Unicom hopes in winning high-end subscribers, says Ted Dean, the president of research firm BDA.

The iPhone’s experience is not an unusual one. The Shanghai Daily reckons about 25% of China’s 700 million mobile phone users rely on a smuggled or counterfeited handset.

Well, as the old saying goes, if you can’t beat them, join them.

So Unicom has announced that it will offer all the 3G services available to “legal” Unicom customers to grey market iPhone users too. The operator will extend a similar offer to other grey market customers in future, says the China Business Times.

Unicom is also looking to partner with handset resellers like Vgooo, one of the largest sellers of grey import phones in southern China.

Gu Jingkui, manager of Vgooo, told the Southern Weekly that most of his inventory comes from Europe, Japan and Hong Kong. In addition to the iPhone, he also sells other big labels like Nokia, Ericsson, and Samsung.

“People buy phones from us because we are cheaper and we have models that are not widely available in the mainland,” Gu explains.

Thanks to its retail clout, Vgooo has also been successful in signing up new subscribers.

And since most of the phones sourced from Europe and Japan operate on the WCDMA standard – which only China Unicom operates – the telco provider indirectly becomes a beneficiary.

Gu said his chain has signed up more 3G users than any Unicom branch over Golden Week. They are also offering customers who have bought a 3G phone from the store a deal: pay Rmb50 for a China Unicom number. “Partnering with Unicom not only plays up our strength in grey imports, but also brings customers to Unicom,” says Gu. It’s a sort of questionably-legal win-win situation.

In truth, Unicom has a lot of catching up to do in the 3G race, with only 530,000 users on its WCDMA network. China Mobile had 1.33 million subscribers at the end of August; China Telecom said it had 1.3 million 3G subscribers at the end of June.

Vgooo has a lot at stake, too. It’s becoming more difficult to source merchandise. Last month, Shenzhen Customs caught a 100-member gang involved in smuggling electronic products across the border.

“If selling service contracts for Unicom becomes a viable business, maybe one day we can get out of the grey import business altogether,” Gu sighs.

But for now, he will probably stick to selling his grey import iPhones.

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