In China, once-thriving Apple scalpers are struggling

Reporting from Beijing —  Brusque with a 2-day-old stubble and a cigarette dangling from his lip, Zhao Xin is the last guy you’d want waiting on you at the Apple store Genius Bar. But if you need to get your hands on a genuine iPhone immediately, Zhao is your man.

Skimpy supplies of the Apple Inc. smartphone gave rise to scalpers like Zhao who prowl the perimeter of the company’s flagship store here touting their wares to anyone within earshot. By hoarding and smuggling in the devices, they satisfied an unmet demand and charged a premium. Last November, an iPhone 4S from Hong Kong could have fetched $2,000.

No more.

With Apple boosting iPhone stock online and partnering with more local mobile carriers and retailers, Zhao and his cohorts are now in liquidation mode. Customers leaving the Apple store are stopped and offered the phone at face value. Zhao will now even sweeten the deal by throwing in a screen guard for free.

“I’d like to charge more, but no one wants to buy them,” he said. “I can’t make a profit.”

China, long thought of as the manufacturing hub for iPhones, iPads and MacBooks, is now the Cupertino, Calif., tech giant’s most promising new market. Apple’s revenue here soared to $13 billion last year, up from $3 billion in 2010.

But the company’s expansion is dealing a blow to a unique part of China’s Apple experience: a thriving underground system of smugglers and unofficial resellers who had unwittingly become key players in the brand’s still-growing distribution network.

The revelation last year of fake Apple stores was owed, in no small part, to the company’s inability to satisfy demand for its products — which are still prized by many Chinese for the status they convey even though they cost 20% more in China than in the U.S. because of taxes.

The so-called gray market phenomenon started more than five years ago, when enterprising dealers, recognizing a void, began flooding China with iPhones carried in from Hong Kong and the U.S., switching the language settings and jury-rigging them for local mobile networks.

An estimated 1.5 million of these gray-market Apple handsets existed in China before the company officially unveiled the iPhone here in 2009. Smugglers are still getting stopped at the border with Hong Kong, sometimes trying to sneak the devices in with baby strollers. One man was caught last month with 30 iPhones taped to his waist and ankles. Customs officials reportedly became suspicious when the man had trouble bending down to pick up his suitcase.

But unauthorized dealers have shifted to hoarding supplies of the made-for-China models, which are easier to activate and come with valid warranties. Scalpers bought as many of the devices as they could online and at Apple’s five official stores in Shanghai and Beijing — some of the busiest and most profitable Apple stores in the world, according to the company.

“The tighter supply is, the more scalpers can charge,” said Kevin Wang, director of China research at ISuppli Corp., who estimates that the number of gray-market iPhones sold in China has declined from as many as 4 million in 2010 to 2 million last year.

Apple tried cracking down on arbitrage sales by limiting purchases to two iPhones per person. Scalpers responded by hiring runners to line up for them and buy more phones.

The back-and-forth came to a head at the launch of the iPhone 4S in January, when gangs of scalpers pelted Apple’s Beijing flagship store with eggs and nearly rioted when they learned that sales of the new handset had been halted.

Even today, the sight of roving scalpers strikes a sharp contrast with the blue-shirted Apple sales staff inside the flagship Apple store in one of Beijing’s trendiest malls.

The men — mostly young, uniformly dressed in black and sporting crew cuts — exhibit the faint menace of soccer hooligans roving in packs. Apple security guards spend much of their day telling them to stand several feet clear of the store.

“They have no right to tell us to leave,” said Fu Chang, a scalper from northeastern China, who was offering both local and overseas versions of the iPhone and iPad to well-heeled shoppers passing through. Many ignored him as if he were a drunk indigent.

“I would never trust a scalper,” said Jack Zhou, an owner of both an iPhone 4 and 4S he purchased through authorized dealers. “What if there was something wrong with the phone? There’s no receipt.”

Although unofficial sales still pad Apple revenues, the company worries they sully the brand experience and diminish the likelihood that users will sign service contracts and download apps.

“Apple has always focused on their retail strategy,” said David Wolf, president of Wolf Group Asia, a Beijing consulting firm. “They want the experience to begin in their store where they have control and make sure you’re happy through the lifetime of your product. You can’t control that when you’re buying from scalpers, who are standing in the cold, smell like cigarettes and are often rude.”

Zhao, the scalper, defends his profession, saying he fills a need by offering the iPhone on the spot, whereas the Apple store will turn buyers away, directing customers to Apple’s website to purchase the device.

In the early days, Zhao said, scalpers laid the groundwork for Apple, ultimately providing the company with free test marketing before the iPhone’s official launch.

The 35-year-old native of central Henan province accuses Apple of limiting supplies on purpose.

“They manipulate the market so that people go crazy over their products,” said Zhao, who declined to say how he acquired his stash of both Hong Kong and mainland China iPhones. “Only in China do you need this many scalpers. If Apple had a normal business model, we wouldn’t be here.”

But now, Zhao said, that may no longer be the case. With abundant supplies available through official channels now, Zhao believes his job will only get harder. If only the 4S had more new features or a Chinese-speaking Siri, he said.

Zhao used to sell two phones a day at the Sanlitun mall, but on a recent sunny weekday he gave up and went home in the early afternoon.

“I don’t even think the new iPad can help us now,” Zhao said.

david.pierson@latimes.com