Tough Times in the U.S.-China iPad Smuggling Game

(Reuters) - Early on the morning of March 16, Wong Tat joined a line of about 100 people waiting for the launch of the new iPad in a chilly rain outside an Apple store on the outskirts of San Francisco.

When the doors opened, he was among the first to buy his quota of two iPads -- the maximum Apple Inc allows per person. Then, sporting a bright red cap for easy identification, Wong began to direct a stream of people toting their new tablets to a silver Mercedes SUV in the parking lot.

After about two dozen of the neatly boxed iPads had been put in the trunk, the SUV sped to a nearby run-down hair salon and massage parlor. There, the haul of the tablets costing about $12,000 was transferred to red, white and blue wholesale bags, which Wong then spirited out the back door into another car.

They are headed for China, said Amy, a 30-something hair stylist at the salon who had joined in the pre-dawn operation outside the Apple store. She would not divulge her last name.

The iPads had embarked on the first leg of a journey that would ironically return them to the country where they were assembled in the first place. They may have been stuffed into suitcases and taken by passengers on a flight to China, or possibly flown by courier to the duty-free territory of Hong Kong and smuggled in students' backpacks across the border into mainland China.

Demand for Apple products, coupled with severe constraints on local supply, has created a thriving black market. A 16-gigabyte iPad bought in San Francisco for $499 -- about $540 including tax -- can be sold for more than $1,000 in Shanghai the next day. Apple sold more than 3 million of the devices -- which now come 4G-ready with a sharper retina display -- in its first weekend.

You can pretty much determine when the first iPad arrives in China by monitoring the first flight out from the U.S. on launch day, said an Apple employee who was not authorized to speak on behalf of the company.

Companies that make iPad accessories, such as cases and speakers, also hire people to wait in line on launch day, a source involved in that business said.

Accessory makers do not get an early peek at Apple products, so they have to scramble as soon as new iPads and iPhones hit the streets to reconfigure assembly lines and craft accessories that fit, he said, speaking on the condition of anonymity.

SERIOUS MONEY

People like Wong, dubbed huangniu, or yellow-bull black-market operator in Chinese, have operated richly lucrative businesses. They pay people like Amy -- code-named nurses because the word hush sounds like helpers in Chinese -- $20 to $30 to stand in line and buy an iPad and iPhone for resale on the black market.

Factor in as little as $12 to ship each device via a Chinese shipping agent, and small wonder Wong and his ilk found it worth their while.

But it's getting tougher and costlier to smuggle the devices into China as the Chinese customs authority has told some U.S.-based shipping agents not to accept orders of iPads, and warned travelers to declare their gadgets at the border and pay a 10 percent import duty on electronics.

Two small shipping companies that ship to China, BLZ Express and Global Courier Services, said they now refuse iPad shipments. Fremont, California-based BLZ posted a notice on its website this month saying: Our clearing warehouses have stopped receiving iPad in accordance with a recent customs authority notification.

UPS and FedEx, the largest U.S. package delivery companies, did not return messages for a comment.

In Shenzhen, across the border from Hong Kong, an online report from the state-owned Guangzhou Daily -- a mouthpiece of the local government -- said the newest iPad was among 20 taxable goods that should be declared by travelers.

I stopped carrying iPad a few months ago because now the customs at Shenzhen can be pretty strict, said a Chinese student in Hong Kong, who declined to reveal his payoff for smuggling.

Furthermore, Apple now simultaneously launches devices in multiple countries, boosting availability and depressing black market prices.

It's getting really hard to do this compared to previous years, said Amy, who wore a dyed red streak in her hair, as she trimmed a young man's faux-hawk hair style in the San Francisco area salon.

An electronics dealer in Oakland, California, said he struggled to break even this year, a far cry from previous iPad releases when he shipped upwards of 1,000 tablets and pocketed profits of $50 to $100 per device sent to his buyer in Hong Kong.

This year, he had no choice but to send 250 iPads via FedEx -- which quotes $110 to ship a 2-pound tablet to China -- hours after they hit U.S. stores. But the same-day launch of the tablet in 10 territories, including Hong Kong, curtailed demand.

This whole game is over, the dealer complained. There's an overabundance of supply. The market's flooded.

He said he visited only a couple of stores in the San Francisco Bay area for tablets, with the Chinese black-market selling-price falling every day that passes.

WEAR IT WITH PRIDE

Despite that expansion in inventory, demand in China still outstrips supply. Online retail site Taobao.com carried iPad listings last week for as much as $1,100, though $600 to $700 price tags were more common.

IPads and iPhones have become badges of Western chic and status to upwardly mobile Chinese, yet they are usually the last to be able to buy them directly from Apple stores.

Industry sources say smugglers operate out of multiple countries, but mainly in the United States because that is where stores carry the most products.

Last Friday in Hong Kong, stores ran out of the newest iPad within hours. They are now sold via a daily lottery there, while they are still readily available in many U.S. stores.

The Chinese nurses are easy to spot -- they stroll in, hand over a note describing the model they want and leave as soon as they get it. Whereas an ordinary buyer will often take their gadget out for a test drive before leaving the store and ask sales employees numerous questions.

Apple has gotten so big that they can flood the market. Before they released it, they probably had been making them for six months and had them sitting in a warehouse. Now they are selling it in Asia and Australia, and it's out 16 hours before us, said the Oakland dealer.

(The story was corrected to remove dozen or so reference from second sentence of paragraph 3 to make it clear there were about two dozen iPads)