**The Great Chinese iPhone Heist: How Apple Lost Billions to Counterfeiters**

Standing outside Apple stores with hundreds of iPhones, hiring accomplices to act like customers trying to return their broken phones, is not an uncommon sight. In fact, it's a tactic employed by thieves who have made a lucrative business out of selling counterfeit iPhones in China. The operation, which has been going on for years, involves standing outside Apple stores with thousands of iPhones, many of which are defective or non-functional. The thieves then attempt to return the phones to the store, claiming they were faulty, and if successful, hand over the working device to an accomplice who receives payment.

The scheme was first noticed by Apple's Shenzhen store, which alone filed more than two thousand warranty claims per week, a higher rate than any other Apple store in the world. This raised suspicions that something was amiss at this particular location, and it wasn't long before Apple realized that their Shenzhen store was being targeted by counterfeiters. The replacement policy in Chinese Apple stores is similar to the US, where employees will swap out your phone if there are no signs of intentional damage.

However, based on unscientific estimates from the Shenzhen Apple Store, about 10% of warranty claims were found to be fraudulent. But once Apple began investigating this issue, it was discovered that over 60% of replaced iPhones were actually counterfeit. This was a shocking revelation, considering that in the US, fraudulent claims range from about 5 to 10%. The sheer scale of the problem in China was clear, and Apple knew they had to take action.

Initially, Apple's approach to solving this issue was to create a reservation system which required proof of ownership of an iPhone. However, the system was quickly overrun by hackers who filled up every reservation timeslot, leaving legitimate customers unable to get their warranty claim acknowledged. This was not the only problem Apple faced; thieves had also obtained customer records and serial numbers of iPhones that were already sold in China, allowing them to reconfigure the phones with stolen serial numbers.

To combat this, Apple attempted to use diagnostic software to help detect fake components without having to disassemble the entire phone. However, hackers had also found a way to completely disable their iPhones, preventing Apple from running diagnostic tests. In a bizarre twist, thieves even threatened an Apple store manager with a cattle prod in an attempt to intimidate them into replacing their iPhone.

The situation became so dire that Apple was forced to stop offering in-store replacements altogether, and devices had to be sent to repair centers for inspection. While this measure did reduce the number of fraudulent warranty claims from 60% to between 30 and 50%, it still fell short of the US average of five to ten percent. Apple continued to make changes in order to identify fraudulent claims more easily, such as dipping batteries in a special dye encoding processors with a waterproof sealant which were only visible under UV light.

The efforts paid off big time for Apple, who saw a significant reduction in fraudulent claims from about 40% to just 20%. This saving estimated to be billions of dollars that would have otherwise been lost. However, the problem in China is still ongoing, and it has recently come to light that Chinese spies allegedly planted microchips on server motherboards manufactured by Super Micro, which were sold to Apple and other companies like Amazon for use in their data centers.

According to 17 unnamed sources, Apple had dropped Super Micro as a supplier for their servers after discovering the alleged malicious chips. An unnamed government official claimed that Apple had contacted the FBI about the incident, suggesting that something suspicious was going on that they didn't want the public to know about. The situation is still developing, and it remains to be seen what exactly happened and who was involved. As more information comes to light, it will likely become clear that this is just another part of Apple's ongoing struggle with counterfeiters in China.

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"WEBVTTKind: captionsLanguage: enhey guys it's Greg with Apple explainedand in this video we're gonna explorethe issues Apple has been having withChina including everything fromdeclining growth to repair fraudnow this topic was the first-placewinner of last week's voting poll and ifyou didn't get to vote make sure you'resubscribed that way the voting pollswill show up right in your mobileactivity feed and you can let me knowwhich video you'd like to see next so itwas around 2015 when Apple consideredChina one of the best markets for growthand Apple actually hoped the Chinesemarket would one day be bigger than theUS because at the time the Chinesesmartphone market was boomingand because the Chinese population is somuch larger than the US it made sensethat if Apple could become a leader inthe Chinese smartphone market they couldpotentially make more money from thecountry than any other but since thenthings haven't exactly played out theway Apple would have liked because from2015 to 2017 apples sales to the Chinesemarket declined by about 23% and thatwas the exact opposite of what Appleexpected to happen so the big questionis why isn't the iPhone selling well inChina and the answer is causing somemajor problems for Apple because as thesmartphone market was growing rapidly in2015 Chinese smartphone companies becamevery aggressive in their push todominate the market and they were ableto offer smartphones comparable to theiPhone for lower costs with additionalfeatures that catered to the localChinese market for example the Oppo r9swas the most popular smartphone in Chinain 2017 and a major reason for itssuccess was likely its price which camein at 405 dollars whereas the iPhone 7cost seven hundred sixty five dollarsand the features included in the iPhonelikely weren't dramatic enough tojustify the 360 dollar premium actuallythe Oppo r9 s featured a very similardesign to the iPhone 7 with a displayvery similar in size and although itdidn't run iOS and wasn't as fast it wasgood enough for most users and thatisn't even considering featuresthat make local Chinese smartphones morefunctional than the iPhone take digitalpayments for example Apple pay hasfailed to become popular in China sinceit doesn't allow third-party companieslike WeChat and Alibaba to use thetechnology as a result Apple payaccounted for just 1.8 percent ofChinese mobile payments in 2017 whilefar more popular payment services likeali peg and $0.10 accounted for 91percent of the mobile payment market sowhat isn't surprising that Chinesecustomers wouldn't really considerpurchasing a smartphone without nativesupport of the most popular mobilepayment platforms and if that wasn't badenough Apple's entire iOS operatingsystem is becoming less valuable tosmartphone customers since the rise inpopularity of something called miniprograms which is essentially an appecosystem within the WeChat applicationand could potentially take the place ofiOS since it serves almost all the samefunctions now we chat is kind of likethe Facebook of China and it servesalmost every purpose you can imaginefrom messaging to social media to payingfor train rides to booking doctor'sappointments almost anything you canimagine can be accomplished from withinWeChat in conjunction with their miniprogram platform and you can see whythis is a huge problem for Apple becausewe chat is available on iOS and Androidso it doesn't really matter what kind ofsmartphone you have the WeChatexperience and functionality will be thesame across all platformsso it makes sense that Chinese consumersare looking at the iPhones higher priceand wondering what value it offersbesides a nice design and a little morepower now you might be thinking wellwhat can Apple realistically do in thissituation they can't control WeChat ormake iPhones any cheaper and that's truebut Apple has taken a slightly differentapproach to China in 2018 that led to an11% increase in revenue and theyaccomplished that by positioningthemselves as a premium smartphone makerwith the most premium product which ofcourse was the iPhone 10 in fact whenthe huawei mate 10 was releasedfollowing the iPhone 10 in 2017it didn't feature an edge-to-edgedisplay like the iPhone not to mentionits materials weren't as premium so bycreating a smartphone with a premiumdesign and premium features like face IDApple was able to separate the iPhonefrom its competition and because of that2018 was a step in the right directionbut as local Chinese smartphone makersbegin to catch up to the iPhone 10 and10's it'll be up to Apple to releaseanother big iteration of the iPhone toreestablish their position as a premiumbrand in China but declining sales isn'tthe only issue Apple is having withChina because since 2013 Apple has beenfighting iPhone repair fraud in thecountry a problem that has cost Applebillions of dollars and prompted afull-scale investigation and from thatinvestigation an organized crime schemewas uncovered where thieves would buy orsteal iPhones remove valuable componentsincluding the processor screen and logicboard and replaced them with fake partsor other items including things likebubblegum wrappers from there thethieves would try returning the iPhonesto an Apple Store by claiming they werebroken and more often than not they getexactly what they wanted a fullyfunctioning replacement iPhone that theywould later resell and remember theparts they harvested from the iPhonethey returned while the thieves usedthose parts to repair iPhones in otherareas of China so not only did they makemoney from selling the replacementiPhone but they also made money byoffering third-party repairs withauthentic iPhone components they got forfree and they were able to scale thisoperation by standing outside Applestores with hundreds of iphones andhiring by standards to act likecustomers trying to return their brokenphone and if they were successful inobtaining a new functioning device theywould hand it off and receive paymentfrom the thieves now there aren't manyApple stores in China today so it wasn'tdifficult for Apple to notice thatsomething was off at their Shenzhenlocation since that store alone filedmore than two thousand warranty claims aweek which was higher than any otherApple store in the world and it madesense why Shenzhen was the tarfor this kind of criminal operationbecause not only is there already quitea bit of criminal activity in the areabut it's located near Hong Kong andcontains the hugely popular hua ChongBay electronics market which is likelywhere the stolen iPhone components aresentnow the replacement policy in ChineseApple stores are similar to the US whereemployees will swap out your phone ifthere isn't any signs of intentionaldamage and based on unscientificestimates from the Shenzhen Apple Storeabout 10% of warranty claims were foundto be fraudulentbut once Apple began investigating thisissue it was found that over 60% ofreplaced iPhones were fraudulent andconsidering fraudulent claims in theu.s. ranged from about 5 to 10% it wasclear that Apple had to do somethingabout this issue since it was costingthem billions of dollars in fact Appleexpected to spend about 1.6 billion in2017 on global warranty claims but thatamount ended up ballooning up to 3.7billion more than double their initialestimate in China was the largestcontributor to that cost now Apple'sfirst approach to solving this issue wasto create a reservation system whichrequired proof of ownership of an iPhonebut the system was overrun by hackerswho filled up every reservation timeslot which meant legitimate customersdidn't even have a chance at gettingtheir warranty claim acknowledged soApple's second approach was to usediagnostic software to help detect fakecomponents without having to dissemblethe entire phone but this time thethieves would just completely disabletheir iPhones so Apple wouldn't evenhave the opportunity to run diagnostictests anyway and if that wasn't badenoughhackers actually obtained customerrecords and serial numbers of iPhonesthat were already sold in China so theycould reconfigure the iPhones theyintended to return with the stolenserial numbers now these methods may nothave worked as well as Apple had likedbut it did make fraudulent returns muchharder than it ever had been and thisfrustrated a lot of thieves whoeventually tried bribing Apple employeesto replace their iPhones and this allcame to a headwhen one thief threatened a storemanager with a cattle prod so things gotso bad that Apple was forced to stopoffering in-store replacementsaltogether instead devices had to besent to repair centers for inspectionnow by 2016fraudulent warranty claims in China wasreduced from 60% to between 30 and 50percent so there was definitely animprovement but those numbers stillweren't anywhere near the u.s. is fiveto ten percent so Apple continued tomake changes in order to identifyfraudulent claims more easily and mostof those changes happen in the supplychain like dipping batteries in aspecial dye encoding processors with awaterproof sealant which were onlyvisible under UV light and those effortspaid off big time for Apple who saw adecrease in fraudulent claims in Chinafrom about 40 percent to just 20 percentsaving the company billions that theywould have otherwise lost now there isone more problem Apple as having withChina but the story is still developingand it's so complex that I think I'llcover it in detail in another video butin short it's recently been discoveredthat Chinese spies allegedly plantedmicrochips on server motherboardsmanufactured by Super Micro that weresold to Apple and other companies likeAmazon for use in their data centers nowthis is all according to 17 unnamedsources and Apple is denying they foundany malicious chips in their servers butjudging by Apple's actions they may notbe telling the whole truth because in2016Apple dropped Super Micro as a supplierfor their servers and an unnamedgovernment official claimed Apple hadcontacted the FBI about the incidentwhich suggests something suspicious wasgoing on that they didn't want thepublic to know about now as I saidbefore this is a developing storyso as we find out more I'll eventuallymake a video covering it all from startto finish but in order to do that we'llhave to wait for this whole ordeal tocome to anso that was a closer look into Apple'sChina problem and if you want to votefor the next video topic don't forget tosubscribe thanks for watching and I'llsee you next time\n"