CHINESE consumers appear fixated with Apple’s iconic iPhone. It draws throngs of eager buyers in Shanghai’s Xujiahui computer market. Similarly, at the Canton Trade Fair in October, vendors hawking familiar-looking silver and black slabs were convulsed in crowds, in sharp contrast to the deserted booths of rival brands, where lonely salesmen slurped disconsolately at noodles. So how can it be that China Unicom has seen dismal initial sales under its exclusive arrangement to sell the iPhone in China?
The explanation lies in China’s huge “grey” market for handsets, which includes some genuine phones imported without the manufacturer’s blessing but is mainly comprised of knock-offs. The iPhones at Xujiahui fall into the former category; those at the trade fair into the latter. Illicit phones comprise a staggering 40% of Chinese firms’ production, and 13% of the world’s, according to iSuppli, a research firm. It reckons China will produce 145m of them this year, up by almost half since 2008. This has hit sales of legal phones.
Grey-market handsets are often simple and cheap. But legitimate manufacturers remain quite competitive at the bottom of the market, so grey-market firms are increasingly offering more sophisticated devices at dramatic discounts to branded smart-phones, says BDA, a consultancy in Beijing. They have developed distribution networks across the developing world.
Grey-market manufacturers are not just copycats. Many of them add innovations to the devices they are counterfeiting. Some fake iPhones in China, for example, can take two SIM cards, and thus handle two different numbers through the same handset. Chinese grey-marketeers have secured half the Ghanaian market with phones that can do nifty things like receive television broadcasts, says BDA. In Kenya, Chinese models (including an imitation BlackBerry) feature images and quotes from the country’s favourite grandson, Barack Obama. A model in the shape of a dagger is popular in the Gulf states.
Grey-market manufacturers also pride themselves on their ability to bring models to market quickly. An iPhone clone named a “HiPhone” appeared in China within six months of the release of the original iPhone in America. Security at the factory where iPhones are made in southern China is legendarily tight. In July a man working for Foxconn, one of Apple’s subcontractors, was said to have committed suicide after a prototype he was responsible for disappeared.
Given their low prices and added features, the spread of grey-market phones might seem unstoppable. But as iSuppli notes, components for the handsets come from brand-name producers which are likely to become less tolerant of pirates. Grey-market phones are beginning to worry governments, like China’s, that make great efforts to police every form of communication, because they lack the identification codes of legitimate phones and are therefore untraceable. But the biggest impediment may simply be a lack of quality control. BDA points out that despite China’s booming exports of grey-market phones, domestic sales have started to fall. Customers have realised that they break easily and come with no guarantees.