iPhone 6 Becomes Available In Hong Kong
People buying and reselling newly purchased iPhone 6 units during the launch of the new Apple iPhone 6 and iPhone 6 Plus on September 19, 2014 in Hong Kong. Lam Yik Fei—Getty Images

The iPhone 6 Lines Weren't Actually Filled With the 'Chinese Mafia'

Sep 25, 2014

A video posted on YouTube Saturday showed what it claimed was the "Chinese mafia" camped outside Manhattan's Apple Stores in anticipation of the first day of iPhone 6 sales on Sept. 19. Most of the front-of-line dwellers were old, spoke little English and declined to comment. Some slept on cardboard boxes. Others waited patiently on lawn chairs. One woman was even shown being arrested.

Since then, the footage has amassed nearly 2.5 million views, raising concerns about the foreign buyers, many of whom resold the iPhones at exorbitant prices in China, where the iPhone 6 is not yet on the market. The Chinese have "learned capitalism the wrong way," according to one YouTube commenter. Or in the words of another commenter, those in line will "ship the phones back to China and make huge profits."

There's no disputing that there's an underground market for iPhones, analysts who study China's wireless market told TIME. But for most first-in-line buyers, the iPhone 6 gray market, while expansive, is far from what's implied by a "Chinese mafia." In reality, the process both stateside and overseas is much less of a structured, profitable operation.

In the U.S., many Chinese buyers crowding Apple Stores were likely from poor areas of major Chinatown areas, especially in New York and San Francisco, according to Linda Sui, an analyst at Strategy Analytics. "They need money. Most of them are low-income people," Sui said.

Analysts agreed that in reality the U.S.-China iPhone 6 grey market trade was rather fragmented. Those who purchased the iPhone 6 in the U.S. often did not sell it directly to a customer. Rather, they connected through word of mouth with scalpers who were transporting the devices to China. These scalpers would then sell the iPhone units in China for a third time: a buy, resell and re-resell.

"In Chinatown, there are small circles, so many people know each other," Sui said.

Carl Howe, an analyst with 451 Research LLC, estimated that these first-in-line buyers—many who waited days for the iPhone 6 to go on sale—will make "whatever the market will pay." That's only a few hundred dollars of profit after selling an iPhone 6 in the U.S. for about $1,000. Sui estimated that the maximum profit was only around $300 to $400 for the hours spent camping outside.

But once the phones arrive in China, where Apple has still not confirmed a release date for the iPhone 6, they could be sold for up to nearly $3,000 due to high demand, according to several reports. “I have around 200 pre-orders with 60 to 70% of these from mainland Chinese customers,” phone reseller Gary Yiu told AFP days before the iPhone 6 launched. Yiu said the 128GB gold iPhone 6 Plus could be resold for over $2,580 immediately after release.

"Nowadays I think it’s a lucrative enough business that there are literally gray market wholesalers," Howe said.

Unlike stateside first-in-line buyers who just wanted a bit of quick cash, many Asian wholesalers had decidedly less innocent motives. iPhone wholesalers tend to be small businesses, and they hire or transport people to wait in line in Hong Kong, Japan, Singapore and Australia—countries in the first batch to receive the iPhone 6—before illegally smuggling them into mainland China to avoid import taxes, according to Bryan Wang, a Beijing-based analyst at Forrester Research.

"In Singapore, what [organized groups] do is they hire people to queue up for the whole night," Wang said. "These folks got $130 in cash for being there overnight."

Still, while there's certainly a small-scale, organized iPhone trade, the buzz in the U.S. and Asia has obscured the fact that transactions in the underground market aren't as fluid or clear-cut as they seem, analysts said. Getting the iPhones back to China, for example, isn't as simple as making a cash payment. The South China Morning Post (SCMP) reported Tuesday that authorities seized 600 iPhone 6 units from people attempting to smuggle the phones from Hong Kong to the neighboring Chinese city of Shenzhen to avoid paying electronics duties of up to 50%. Forrester Research estimated that two years ago, 70% of iPhones sold in Hong Kong were trafficked to China. Border security in Hong Kong has tightened up, according to the SCMP, which also published images of concealed iPhones.

There are also technical issues with using a foreign-bought iPhone 6 in China, according to analysts. They suspect the iPhone 6's initial launch precluded China because Apple and China's Ministry of Industry and Information Technology were sorting out discrepancies between China's network and foreign networks. As it stands, some foreign-bought iPhone 6 models will either work at slow speeds or not at all in China, a fact that may have eluded Chinese buyers of resold iPhones.

"There’s actually 18-20 different iPhone 6 models built to satisfy different requirements," Howe said. "I doubt there’s a whole lot of full disclosure [in the market]."

Perhaps the most surprising look into China's underground iPhone 6 market is that many of its participants—even on the reselling side—are ordinary individuals hoping to score some pocket money, not organized groups.

Wang said he has friends with stable jobs who still participate in iPhone buying and reselling just to make some extra money. His nephew, a student in Sydney, Australia, queued up for over 12 hours to obtain an iPhone 6, like many other Chinese students studying abroad in countries selling Apple's newest smartphones, and then immediately sold it. Young students also participated as smugglers, and many were caught at China's border, according to the SCMP.

The gray market will continue insofar as the demand remains, analysts said, especially as Apple has established itself as a premium, luxury brand, even if it's not China's best selling smartphone. "In Chinese, we call [the buyers of re-sold iPhones] tuhao, which means less educated, newly rich people," Wang said. "Basically, they just want to be the first one get the devices."

"If you look at the legitimate market, which model is selling well?" Sui said. "Then you’re going to find it in the smuggled market as well."

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