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iPhone Smuggling Housewives Brought to Trial

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iPhone 5 will launch in China soon.

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MINYANVILLE ORIGINAL A large grey market for Apple (NASDAQ:AAPL) products has grown over the past two years. Some impatient Apple enthusiasts would rather pay more for a smuggled product then wait the usual three months for its official release while others just want to find a better deal. However, mainland Chinese and Hong Kong authorities have been cracking down on electronics smuggling rings.

According to Reuters, 25 smugglers have been tried by the Shenzhen Intermediate People's Court this past Wednesday for participating in five smuggling rings that were busted in April. Hong Kong and mainland Chinese officials arrested 104 individuals, some of whom had ties to LanyouShuma.com, which previously held the position as a top seller of Apple products on Alibaba's Taobao C2C marketplace. Most of the 104 have pleaded guilty. The Hong Kong Independent Commission Against Corruption forced Lanyou to close its shop after authorities launched an investigation and discovered LanyouShuma sold the iPhone 4S at below market prices in mainland China. At one point, 20,000 items were sold per month through the website.

Over the past two year, the rings have smuggled over 162,000 mobile phones worth over 500 million yuan, or $80 million, from Hong Kong. The court tried 25 of them for smuggling both iPads and iPhones and evading 54.87 million yuan in taxes.

Half of the suspects are housewives who frequently traveled to Hong Kong pretending to be tourists. Each received 20 yuan to 30 yuan for every phone smuggled into China. On average, each of them smuggled over 60 handsets to China daily.

China imposes high import and luxury duties on electronics and luxury products. In 2010, the Chinese government levied a tax on imported iPads. Even with the elevated grey market prices, smugglers can still turn a profit while undercutting other traditional retail locations. Individuals from China commonly shop in Hong Kong or in Europe for electronics and luxury goods to circumvent the higher prices caused by the taxes.

Despite the tougher measures by authorities, smugglers still exploit the lack of the iPhone 5 in mainland China.

When Apple released the iPhone 5 on September 21, some of the smartphones made it from Hong Kong to a store in the southern Chinese city of Shenzhen within five hours. There they were sold for between 7,500 yuan and 9,000 yuan. In Hong Kong, the smartphones had a price equal to 4,545 yuan. A salesman who had three iPhone 5s on display that day said, "The stock is so limited that people are treating these iPhone 5s like gems."

Earlier in the week, customs agents in Hong Kong caught smugglers trying to sneak 227 iPhone 5s and 22 iPads across the Shenzhen-Hong Kong border along with other electronic devices in a truck. Using a truck is relatively uncommon, but since border security has tightened, smugglers have resorted to other methods. The number of iPhone 5s equaled roughly 1 million Hong Kong dollars, or $129,000. Including the other devices, the goods had a total value of roughly 4 million Hong Kong dollars.

The grey market for iPads has been just as prevalent. In 2011, a Beijing research firm reported that of the one million iPads sold in the second quarter of 2011, almost half of them came from the grey market.

Apple opened a store in Shenzhen on November 3 to try and alleviate the smuggling problem. Foxconn Technology also assembles the iPhone and iPad in this city.

Some will desire a smuggled iPhone 5s regardless of when Apple officially launches the smartphone in China. The smuggled phones sell well in mainland China because many of the smartphones come unlocked and owners wish to use China Mobile (NYSE:CHL), China's largest wireless provider, as their service provider. Even though Apple hasn't reached an agreement with China Mobile to allow the wireless carrier to sell the iPhone, many unlocked iPhones run on China Mobile's network. Back in 2011, China Mobile had 7.44 million iPhones registered on its network.

During Apple's recent conference call, CEO Tim Cook told investors the iPhone 5 should officially be launched in China by the end of the year. Apple has partnered with China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA). It is still trying to reach a deal with China Mobile.

Twitter: @ChrisWitrak
No positions in stocks mentioned.
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