Felix Salmon

It’s a large world after all

By Felix Salmon
November 16, 2009

Ultimi Barbarorum’s little-known other author, “Bento”, has a great blog entry up about the iPhone in China. Bento lives in Shanghai, and explains very simply why official Chinese iPhone sales are low: official Chinese iPhones are artificially crippled, thanks to a law banning phones with wifi capability. So the tech-savvy Chinese simply buy unlocked (and cheaper) iPhones from Hong Kong instead, which don’t show up in the official sales numbers.

This dynamic is well-known in Shanghai and across much of the rest of China:

The distribution model is extensive and robust, and in fact most Chinese buy their mobile phones from stalls like this. There are no iPhone shortages, as prices fluctuate to meet demand.

Yet somehow, in this age of universal connectivity, none of the Apple-watchers seems to have known anything about it. Instead they took the official statistics at face value, trying to read all manner of implications into them about Chinese demand for iPhones or the lack thereof.

I’m curiously reassured by this episode: it goes to show that markets really aren’t all that efficient after all, and that information flows in unpredictable ways. And that good bloggers and journalists can still be very helpful in telling the markets something they didn’t know, even if it’s common knowledge in Shanghai.

7 comments so far | RSS Comments RSS

Hello, Bento here:

Just to be clear: The pundits do know the official Chinese iPhone is crippled. They just don’t get why Apple would want to introduce it in China. (Answer: to allow iPhone advertising and a Chinese app store, both of which benefit Hong Kong iPhone sales.)

PS I prefer “mysterious” to “little-known”.


Could you address how this shows that markets aren’t efficient? Seems to me to show exactly that they *are* efficient. Is Apple’s stock being mispriced by the belief that they have no future in China? Is this information (the crippled phones, the sales number in Hong Kong, the fact that Chinese don’t buy the crippled phones) somehow *not* having the effect it should? Are Chinese buying worse phones at higher prices?

Posted by secretivek | Report as abusive

Market inefficiencies illustrated by this story:

1) There is arbitrage occurring. The unlocked-at-the-factory iPhones are available from the Apple store in Hong Kong at 4800 RMB and they sell for 6000 RMB in Shanghai. That’s a 25% markup and well above any reasonable estimate of transportation costs.

2) Apple watchers and market commentators were not aware of something that is common knowledge on the streets of Shanghai. Since efficient markets imply complete knowledge sharing, the market isn’t efficient.

What adjustment should occur to Apple’s share price as a result of this information I have no idea, but bear in mind that the total number of reported sales is still correct, it’s just that some sales to China (mainland) are being reported as sales to China (Hong Kong).

Posted by Qwerty | Report as abusive

@ qwerty, agree. And as a once-and-future Russia-watcher, more broadly, it shows that you can have enormous, ENORMOUS numbers of smart people running around, all yelling things like “Woo woo! China is the future!” and yet still significant amounts of information on widely watched topics such as AAPL get imperfectly understood. Just think what we probably don’t know about, say, Chinese alternative energy companies looking for NASDAQ listings.

Posted by SelenesMom | Report as abusive

LOL gotta love the self-important strains sometimes regurgitated by bloggers. All bloggers really are are linkers to interesting articles that may or may not otherwise have come across the readers purview – normally the opinion penned is irrelevant. The self-congratulation for doing your job is akin to a defensive player in NFL making a sack and celebrating like he just won the Superbowl.

I think it even lessens your ‘credit’ when most of the links you do post are usually sent to you; it’s not you’re trawling the web and found all this great stuff.

Posted by Not_American | Report as abusive

I love it.
1. Everyone agrees that the government is causing a problem.
2. Markets deal with it as best they can behind the scenes, but imperfectly.
3. Blogger celebrates this as an example of market inefficiency.
4. Commenter points out this illogic.
5. Different commenter claims that efficiency requires everyone to have all knowledge.
6. I hit my head from reading this stupidity poor understanding that comes from I have no idea where.

Posted by Robert Simmons | Report as abusive

There’s quite an amusing symmetry here. US phone networks have crippled smartphones (especially Nokia’s) for years, which was a major factor in allowing the iPhone to make such inroads in the US despite offering less functionality than many much cheaper smartphones would if they weren’t crippled (and do in other countries). Now the iPhone is being crippled in China, causing Apple and mainland China’s economy to lose revenue. Silly behaviour all round.

Posted by Ginger Yellow | Report as abusive

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