Apple Has a Secret
Remember when there was a discrepancy between the number of iPhones sold as reported by Apple and AT&T? What was never disclosed was that the higher number was the correct number.
You may recall that AT&T reported sales of approximately 750,000 units whereas Apple reported that AT&T sold approximately 1,250,000 units. So what happened?
The iPhone is manufactured and assembled in China by Li Wen Electronics in Shanghai. And as you know Shanghai is a huge distribution hub for China, this is an important point.
At the time of the discrepancy, it was suggested that the reason the numbers differed was due to AT&T counting activations and not actually counting sales, which can vary since consumers do NOT have to activate their phone upon purchase.
Now, back to China. During the manufacturing, approximately 1 in 5 iPhones were pulled out of the final production line and sent to a warehouse approximately 5 kilometers from the factory. From there they were then re-opened, hacked, repackaged and distributed to bootleg resellers in China, Hong Kong, Japan and India.
Apple did an extensive internal investigation and discovered that Li Wen Electronics Plant Manager and VP of Operations Xu Hung was behind the embezzlement. Apple then reported this to the PRC Police in Shanghai, and Xu Hung was arrested in December 2007.
So, how could Hung do this? Considering the profile of Apple and the buzz around the iPhone, he was able to force most parts suppliers in China to drop their prices by 15-20%, but he had his buyers report the cost at the original higher price but to reduce the number of components used by 20%. Ultimately, this means that each iPhone, which last year had an initial margin of 18.5% (which is Apples target margin) was actually understated versus the actual cost which was 15-20% less thus meaning the true margin was in the mid 20% range.
Now you know, and now you know why Apple dropped the price of the iPhone last year. Xu Hung is still in prison awaiting his trial ...
