Jun 01

Across the seas: an iPad’s “gray” voyage

Written by Nimrod on Tuesday, June 1st, 2010 at 12:00 pm
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A shopper looks over an iPad at an Apple Store.

Apple was elated that iPads sold briskly. Then they fretted when they sold out. Apple continues to experience supply shortages, just like with the iPhone release. Where have all the iPads gone? It turns out the iPads are not just made in Chinese factories, but even their distribution is re-routed by networks of Chinese people.

A CBN Weekly (第一财经周刊) feature examines the intricate gray market for iPads, and the role of overseas Chinese in this informal logistics chain.

By Xie Leining and Lei Jingshu

“The iPad is here.” Ads from Apple are proclaiming in the United States. But they are false.

On April 21 reckoned by local time, the Apple Store in the busy Northpark Shopping Center here in Dallas has not sold a single iPad for a week. The same at a store five miles north of here. Go further some ten miles and it is still the same.

In each of these stores, a dozen display iPads are put on the big tables near the entrance. Then after you’ve experienced the smooth operation of the 9.7″ touch screen and the rich content, including music and videos from iTunes, book readers, AppStore, email and social web functions, and office software, and you’ve satisfied yourself and ready to pay up, the store associate will tell you they are out of stock. And they don’t know when more will arrive.

On the same day, Bill Jordan picked up his pre-ordered iPad from a Colorado Apple Store. Just as he walked out and put the iPad into his shopping bag, two robbers appeared behind him and grabbed the bag from him. Though the 59-year-old fought them, his bag was still taken from him and he got his finger injured. The local police found the surveillance video and the Apple Store are cooperating with police, saying they record the serial number on every iPad sold.

Either these were two technology-loving robbers, or the iPad is a really hot item. More and more we are led to believe the latter is true.

Mose is a professional scalper. He buys products from regular retail channels, then sells them to designated hoarders. His most recent target is the iPad. Lots of iPads. Just two days ago, he went to two stores and swept four iPads. The second day he went to four stores but only got two. And, the Apple Store refused the use of cash and gift cards. If a customer’s credit card information showed he had already purchased two or more iPads, then the store would not sell him another one no matter what. You could go to Best Buy to circumvent Apple’s control and sweep one or two per store per day. But most of them have already been swept up. If you go to Apple’s store online, the earliest you can get them is ten days later.

So at this time the news at every store is, there will be no stock this weekend.

Where have all the iPads gone?

Beside asking Apple’s supplier, you could also go to a place like “MITBBS” to find your answer. This is one of the largest and most popular overseas Chinese forums in the United States, with 20 thousand people regularly logged on. “Fleamarket” is one of the several hundred forum boards. The main topic of discussion is how to use various tactics to obtain electronic products from the retail distribution channel. It works like this. There are two job titles, “Superdoctors” and “Nurses.” A Superdoctor is the equivalent of a redistribution point or somebody with access to professional distribution channels. Behind them are usually import/export companies. A Nurse, on the other hand, is somebody like Mose, who is responsible for sweeping retail and online stores for products to sell to Superdoctors. According to an experienced Nurse named Galvin, a “Healthcare Team” headed by about ten Superdoctors and their Nurses managed to hoard more than 30,000 iPads within three weeks of iPad’s release.

We begin on April 16. This was the second Friday after the iPad’s release in the US. At 12:26 Eastern time, reknowned Superdoctor RL posted a buy bid on the “fleamarket” board of MITBBS for eleven 16G iPads, at $620 each, postage paid.

The “gray” voyage of an iPad (16G Wi-Fi)

First Leg: Apple’s authorized reseller
Agent: Professional scalper
Purchase Price: $540

Second Leg: US to Hong Kong
Agent: Hoarder and import/export company
Purchase Price: $575-$620

Third Leg: Hong Kong to Shenzhen
Agent: Courier
Cost: $75-$90

Fourth Leg: Shenzhen to other cities
Agent: Distributor
Final Price: $700-$730

At this time, the buy price for the 16G Wi-Fi version of the iPad had already gone up by $100 from a week before. A “retired” Superdoctor named Yang tells us that the gray market price of the iPad remained stable in the first week. Experienced Superdoctors and Nurses had already hoarded what they believed was a sufficient quantity as early as March 12, when Apple began taking pre-orders. Apple Stores and Best Buy had stock and the sales staff had not begun to police the quantity limit on iPad purchases. Even though demand in large US cities exceeded expectation, they had hoarded enough iPads for delivery. So in the first week, Nurses bought iPads from stores for $540, saved them up, and flipped them to the Superdoctors for a $5 spread.

So, when RL posted a bid for $620 on April 16, it meant a $120 profit for any Nurse living in a tax-free state such as Oregon or Delaware. Even to Nurses facing a 8.25% or 9% sales tax, profitting $70 or $80 from flipping an iPad was a swell trade. It may have exceeded the per-unit profit made by the Superdoctors.

This trade had little risk, so long as they strictly executed their agreed protocol: Superdoctors paid Nurses via PayPal while providing shipping information. Then UPS or FedEx picked up the packages from the Nurses’ homes.

On April 21, the market prices for the 16G/32G/64G iPads had stabilized on the “fleamarket” board at $620/$720/$820. Suppliers filled several pages worth of information. The place was like a busy bazaar. Some uninvolved people temporarily took up the Nurse trade and put their one or two iPads up for sale; some were used. A user named “fairprice” jokingly began selling call options for the following Monday. His post was shut for not being in compliance with exchange rules.

A Nurse called “Igamble” posted a photo titled “stashing corner” to show the quantity of his iPads. Soon he was cornered by several big Superdoctors. They shoved him around ten thousand dollars in exchange for his entire stash. “Nurses set their sights too low. We’re not meant to make big money,” he lamented. He figured the price of the 64G iPad would eventually rise to $900. Because there were true visionaries on the board: in 2009, speculators drove the price of an $8 toy called the Zhu Zhu Pet to $45.

But reality would soon show that the iPad was not to be another Zhu Zhu Pet. The price of the $499-MSRP 16G iPad reached a market peak at $620. After the weekend, Nurses and Superdoctors would be taking shipment of their iPad pre-orders placed ten days ago on Apple’s online store. Some Apple Stores were also getting new stock on April 20. Though not enough to sate the demand of all passing shoppers, it was sufficient to fill pre-orders. Of course, many of these pre-orders were made by professional Nurses. The most informed Superdoctors began limiting buy prices to $575/$675/$750 and putting up minimum quantity requirements.

These hoarded iPads would then take a trip across the seas, going to markets where Apple had not officially released iPads. China is one of them.

Chinese users got to know Apple products later than other markets. But since China has a prosperous gray market, they have found numerous ways to get them. By using a foreign credit card or iTunes points, they even got access to iTunes or AppStore. According to Apple’s official estimate, before Apple and China Unicom released the iPhone last year, there were already millions of people in China using this handset.

Mongkok electronics shops, Hong KongThe Mong Kok district in Hong Kong is one of Asia’s largest redistribution points for gray market electronics. On April 20, iPads were the hot item, and every electronics stall had iPads on display. At Sin Tat Plaza, the price tag for 16G iPad was between HK$5000 to HK$5180 (about $644 to $667). This was a drop of HK$300 to HK$400 from a week before. As smugglers continue to carry their luggage into the mainland, the price may drop further still. Compared to Beijing, Shanghai, or Guangzhou, Hong Kong remains the best place to shop for gray market goods.

Luohu Customs, ShenzhenOn the evening of April 21, at the Pacific Computer City in Shanghai’s Xujiahui district, Tang Yong was ready to sell a 32G iPad for 5800 Yuan ($853). A 16G iPad sold for 4800 Yuan ($706). The iPads coming into these markets arrive from the US in Hong Kong, make their way into Shenzhen via the Luohu Customs point, then flow into other cities. Since the customs clearing fee and the risk of being caught are low at Luohu, this is the frequently used entry-point for gray market electronics into China.

Pacific Computer City, ShanghaiTang Yong makes about 100 Yuan from this 32G iPad. The 5800 Yuan sale price includes mark-ups for using the special purchasing channel, sales tax, cost of shipping, and customs clearing fees. Compared with his initial sales on April 10, his profit had already dropped by 100 Yuan per iPad from increasing competition.

Tang Yong also has a store on TaoBao (China’s eBay equivalent). Like many who flocked to ply the iPad trade on TaoBao, he made sure to write “Professional Overseas Orders” on his ads. In truth, these professional orders are filled by big and small Superdoctors on MITBBS.

He is an avid Apple fan. His cellphone, notebook, are all from that company known for its closed-loop control. Several years ago he became Apple’s authorized reseller in China. He also sells iPhones and MacBooks at his store. But many Apple resellers are also selling gray market iPads behind the counter, because “everybody is.”

On January 17, he waited all night for the iPad announcement. Just like he predicted, this little LED-backlit touch-screen wonder attracted the attention of many Apple customers who had bought from his store. Every day somebody called to ask about iPad’s release in China. Customers were already impatient by February. In the month afterwards, Tang Yong took paid orders from more than 30 customers. They all wanted the iPad.

In the months since iPad’s announcement, TaoBao filled 70 pages worth of merchants taking orders. Initially, few products made it here. At a Zhongguancun brick-and-mortar store, a 16G iPad sold for 7000 Yuan ($1029) at one point. But a week later, as more supply arrived, the price quickly slid. Now, no matter on TaoBao or on MacHome, an Apple user forum, a 16G iPad has a stable price between 4500 Yuan and 4800 Yuan.

There is another subtle point. Every distribution terminal like Tang Yong operates in a black box. When they import from Superdoctors, they get different prices and don’t know what others paid. They differ depending on the import quantity, reputation, and relationship with the Superdoctors. Tang Yong relies on his market experience and his own judgement to decide the price of import. In half a month, he personally sold about 20 iPads.

“The future price is hard to say,” said Tang Yong. According to upstream sources, Apple may implement strict purchasing limits beginning May. It looks like Apple is bent on satisfying US demand first, and preventing the outflow of supplies from the US. It is pushing back the iPad release date for other countries beyond May.

Before China Unicom’s iPhone entered the Chinese market, gray market iPhones had already taken half the market. The same story may play out with the iPad. At least Apple is quickening its pace by announcing the opening of 25 additional Apple Stores in China within two years. Unofficial sources also say that official iPads will be sold in China after May, in step with other markets.

Apple needs to hurry now.

(Tang Yong’s name has been changed)
Contact: liyang@1cbn.com

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10 Responses to “Across the seas: an iPad’s “gray” voyage”

  1. Charles Liu Says:

    Um, iPad reselling on ebay with huge mark-up (2x, 3x) isn’t uncommon at all. Just search for iPad on ebay, then filter by US sellers. I found about 10,000 ebay listings. Doubt they are all overseas Chinese?

    See how much nicer and legit it sounds when it’s just innocent “resale” not “gray market”? I really don’t think it’s that different in China or elsewhere. I remember in the 80’s when Japanese version of Nintendo was hot in US via “gray market” imports. Seems in US the only place iPad is available is also the gray market.

    Anyways, if anyone wants an iPad, local Apple store have wait list, which I would suggest over paying $1200 for one.

  2. pug_ster Says:

    Not surprising. I recall that I had to get an new Iphone 3g without a plan for my Wife’s co-worker in China. I ended up getting one for $540, which is considered a bargain.

  3. Nimrod Says:

    I have nothing against gray market goods. Neither does the author of this article or the people participating in it, it would seem. It’s market forces at work. Obviously there is strong demand in China, and the bigger takeaway is Apple (and many companies) is behind the curve as a result of excessive home market focus. I understand they have to launch in the US first as an American company, but from a business perspectve, America is not where business “is” these days. Just look at where consumption is growing rather than collapsing/stagnating.

    With regard to eBay, I think overseas Chinese are doing a large chunk of the business there. In fact the informal trading network started there several years ago with rebate goods and has only gotten more sophisticated since then. eBay itself is changing its business model. For example it pushed out most small-time auction sellers in the US in recent years and has gravitated toward fixed-price listings from large suppliers in China (often via Hong Kong). So Chinese are involved in trade going both ways.

  4. S.K. Cheung Says:

    I agree with Charles. It’s simply resale. No different than buying concert or sports tickets online. It’s just supply and demand. Apple makes their money at the prescribed price, so they’re not losing anything; and resellers make money based on what the market will bear, while Apple gets free advertising from the market frenzy. In fact, that almost seems to be part of Apple’s marketing strategy these days. If people paid for their units, what they do with them thereafter (including selling at a profit) is their business. The only exception would be if you came by your iPad by mugging someone and stealing theirs, as described in the article. The other thing is that, if you get too good at it (on ebay especially), you might get a visit from the IRS.

  5. TonyP4 Says:

    The re-sale profit is too risky. Those states collecting 5-9% sales taxes without doing much are the actual winners. Usually Chinese buy a lot of electronic stuffs when they travel in US. The tariff from China must be very high.

    No one mentions about the $105 iPed that is manufactured next street to foxconn. It must be buying the same components for IPad ( a risk for foreign companies), but using its own software running under the free Goggle OS. The packaging, menu are pretty similar to iPad. It has a lot of technology behind. I wish this ‘copycat’ will succeed.

  6. Charles Liu Says:

    Nice Tony, why didn’t I think of that? Forget the wait list, call someone in SZ.

  7. Foxy Man Says:

    fascinating story, but a bit too cloak and dagger for what others have noted is simple resale.

    Question: how to keep on top of the trends of what gadgetry sells for how much on the mainland? I’ve got half a mind – no, I’m not finished talking yet, thank you – to buy a half dozen gizmos and sell them in Shanghai next time I make a trip there… which would be a lot sooner if I knew I could make back a good portion of my plane fare on iphones/ipads/blackberrys or whatever’s hot there now.

    You wanna know where the real money in high-end, stylish products is? Breakaway republics of the former Soviet Union. Kazakhstan is the new Eldorado, and I can only drool at the idea of getting a foothold in the Ukraine…

  8. pug_ster Says:

    I thought that this is an interesting article that I found where Apple store refused to sell Ipads to 2 Chinese people unless they show their passport because of this ‘gray’ voyage.



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