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[quote=GUESTJACK,270904]New York Times: After China Ships Out iPhones, Smugglers Make It a Return Trip  By DAVID BARBOZA Published: February 18, 2008

SHANGHAI — Factories here churn out iPhones that are exported to the United States and Europe. Then thousands of them are smuggled right back into China.

The strange journey of Apple’s popular iPhone, to nearly every corner of the world, shows what happens when the world’s hottest consumer product defies a company’s attempt to slowly introduce it in new markets.

The iPhone has been swept up in a frenzy of global smuggling and word-of-mouth marketing that leads friends to ask friends, “While you’re in the U.S., would you mind picking up an iPhone for me?”

These unofficial distribution networks help explain a mystery that analysts who follow Apple have been pondering: why is there a large gap between the number of iPhones that Apple says it sold last year, about 3.7 million, and the 2.3 million that are actually registered on the networks of its wireless partners in the United States and Europe?

The answer now seems clear. For months, tourists, small entrepreneurs and smugglers of electronic goods have been buying iPhones in the United States and then shipping them overseas.

There the phones’ digital locks are broken so they can work on local cellular networks, and they are outfitted with localized software, essentially undermining Apple’s effort to introduce the phone with exclusive partnership deals, similar to its primary partnership agreement with AT&T in the United States.

“There’s no question many of them are ending up abroad,” said Charles R. Wolf, an analyst who follows Apple for Needham & Company.

For Apple, the booming overseas market for iPhones is both a sign of its marketing prowess and a blow to a business model that could be coming undone, costing the company as much as $1 billion over the next three years, according to some analysts.

But those economic realities do not play into the mind of Daniel Pan, a 22-year-old Web site designer in Shanghai who says a friend recently bought an iPhone for him in the United States.

He and other people here often pay $450 to $600 to get a phone that sells for $400 in the United States. But they are happy.

“This is even better than I thought it would be,” he said, toying with his iPhone at an upscale coffee shop. “This is definitely one of the great inventions of this century.”

Mr. Pan is among the new breed of young professionals in China who can afford to buy the latest gadgets and the coolest Western brands. IPhones are widely available at electronic stores in big cities, and many stores offer unlocking services for imported phones.

Chinese sellers of iPhones say they typically get the phones from suppliers who buy them in the United States, then have them shipped or brought to China by airline passengers.

Often, they say, the phones are given to members of Chinese tourist groups or Chinese airline flight attendants, who are typically paid a commission of about $30 for every phone they deliver.

Although unlocking the phone violates Apple’s purchase agreement, it does not appear to violate any laws here, though many stores may be avoiding import duties.

Considering China’s penchant for smuggling and counterfeiting high-quality goods, the huge number of iPhones being sold here is not surprising, particularly given the popularity of the Apple brand in China.

Indeed, within months of the release of the iPhone in the United States last June, iPhone knockoffs, or iClones as some have called them, were selling here for as little as $125. But most people opt for the real thing.

“A lot of people here want to get an iPhone,” says Conlyn Chan, 31, a lawyer who was born in Taiwan and now lives in Shanghai. “I know a guy who went back to the States and bought 20 iPhones. He even gave one to his driver.”

Negotiations between Apple and China Mobile, the world’s biggest mobile-phone service operator with more than 350 million subscribers, broke down last month, stalling the official release of the iPhone in China. Long before that, however, there was a thriving gray market.

“I love all of Apple’s products,” said a 27-year-old Beijing engineer named Chen Chen who found his iPhone through a bulletin board Web site. “I bought mine for $625 last October, and the seller helped me unlock it. Reading and sending Chinese messages is no problem.”

An iPhone purchased in Shanghai or Beijing typically costs about $555. To unlock the phone and add Chinese language software costs an additional $25.
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