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'Gray market' for counterfeit gadgets is red hot in China

By Keith B. Richburg
Washington Post Staff Writer
Sunday, August 8, 2010; A11

BEIJING -- Apple's iPhone 4 is not officially for sale yet in China and may not be for several months. Neither is the popular iPad touch-screen tablet.

But never mind. Both devices are readily available at a plethora of Chinese electronics malls in Beijing, Shanghai and all the major cities, in what constitutes China's lucrative telecommunications "gray market" that rivals -- and in some cases, surpasses -- the real thing.

The phones are smuggled from the United States and also from Hong Kong, where both devices are officially on sale. The smuggled iPhone 4 sells in China for $800 to $1,700, depending on the storage size. An iPad with 64 gigabytes goes for about $1,000.

If those prices are too high, Chinese consumers need not fret -- there are plenty of fakes on the market, almost indistinguishable from the real thing, from the touch screen to the apps to the iconic silver logo on the back. They are known here as "Shanzhaiji," which loosely translates as "Mountain Bandit Phones."

China has long raised the ire of U.S. trade officials for the country's copycat culture and often cavalier attitude toward intellectual property rights. It is known as the world's producer of fake Rolexes, DVDs, luxury handbags, designer clothing and just about everything else.

But the global explosion of smartphones and personal devices has taken the fakery to a more sophisticated level, with the "Shanzhaiji" competing with legitimate manufacturers and claiming an increasing share of the telecommunications market. BDA China, a Beijing-based business advisory firm, said illicit phones made up 38 percent of the handset sales in China in 2009.

Care to buy an 'iPhooe'?

Some illicit cellphones offer ever more advanced features that can outpace even the originals.

"It even has some functions the real one doesn't," boasted one phone vendor showing off a Taiwanese-made fake iPhone 4 at Beijing's Fang Shi Communications and Technology Plaza, a hot, crowed, sprawling edifice to the artificial, offering a dizzying array of fake cellphones spanning two stories.

The fake iPhone's special features include a removable battery and a place for two SIM cards, meaning the user can have two phone numbers ring for the same phone.

"You almost can't tell the difference between this and the real thing," said a vendor, nicknamed "Huzi," explaining that he has sold more than 4,000 since the fakes came on the market a few months ago. It says "iPhone" on the back, with the Apple logo. It even uses real iPhone accessories, like the charger and the earphones. The only difference is the price -- about $100, with a little bargaining.

Huzi, the young vendor with orange-tinted spiky hair, said he has never had a customer come back and complain. His shop does offer a full guarantee.

There are plenty of other fakes as well, some with almost no noticeable difference from the real product except, on closer inspection, the name.

Look at that Motorola cellphone, and you'll see the name is "Motolora." Those Samsungs in the display case are "Samsunc" and "Samsnug." That may look like a Nokia, but it's a "Nckia." And if you think that's a real Sony Ericsson, look again -- it says "Suny Erisscon."

Some of the lower-end iPhone fakes give themselves away by the name on the back. One is an "iPhooe." The cheapest version made in Shenzhen simply says "Phone" on the back.

The vendors seem unperturbed about the possibility that they are breaking the law. "The police won't crack down us -- it's not guns or drugs, why bother?" Huzi said. He added: "The cellphones aren't illegal. If it's illegal, why is such a big market still open here?"

Another vendor named Xu agreed. "If selling this violates the law, how come so many people are selling cellphones here illegally? If it violates the law, how can such a big market still exist?"

No fake iPads were available in Beijing during a recent trip to the markets. But they were readily available in Shanghai, at the Everbright Telecom Trading Center, a multistory electronics mall. The fake iPad costs about $150 in Shanghai -- but vendors warn the download speed is slower than the real thing, and the colors are not as bright.

Emerging markets

Many of the counterfeit cellphones are exported to the Middle East and Africa, a lucrative market for cheap fakes. Some vendors at two Beijing electronics malls said African customers often buy phones in bulk, to take back to their home countries -- possibly to sell as the real thing.

"When they export it to some emerging market countries, they sell the product as the real one," said Kevin Wang, director of China research for the form iSuppli, an electronics industry consulting and research firm.

BDA, the advisory group, said in an analyst's report last year that the illicit phone-makers as a group were China's biggest handset exporter and were poised to become even larger overseas, thanks to their cheap prices, well-established distribution networks, and their ability to customize the clone phones for local users -- like a phone marketed in Kenya with President Obama's likeness and a "yes we can" ringtone." The report said foreign countries would soon replace China as the main market for the Chinese-made fake phones.

The greater risk for legitimate manufacturers like Apple is from the smuggled devices coming over the border from Hong Kong, or flown in the from the United States. The buyer of a smuggled phone can avoid paying China's high import duty or value-added tax.

"The smuggled iPhone will be a real threat to the real iPhone sold in China," Wang said. "If you buy Apple products at Apple's stores in China, it is much more expensive than in Hong Kong or the U.S."

Flora Wu, principal analyst with BDA in Beijing, said in an e-mail that legitimate iPhone handset sales in China in the first half of this year were 800,000, compared with 2.5 million smuggled handsets sold.

"It's kind of a bit of the Wild West in that respect," said Murray King, the managing director for Greater China for APCO Worldwide. He also said China was "getting better" about intellectual property protection in some areas.

King said many buyers of cloned products were often foreigners, who come to China to sop up the fake Rolexes and DVDs. "Far too much has been made about the Chinese market, and not enough about the foreign appetite" for fake goods.

One major push for change, business analysts said, comes from the Chinese people themselves. More affluent consumers are increasingly rejecting fakes and looking for the genuine articles -- as evidenced by the increasing prominence of luxury goods stores in China, from Gucci and LVMH to Mercedes-Benz and BMW. "Consumers are much more in demand for authenticity," King said.

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