China's Used-Phone King Has Designs on Landfill

EghtesadOnline: Millions of toxic smartphones end up in landfills around the world each year. Kerry Chen thinks he can change that, starting with China -- one of the worst offenders.

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05 January 2017

With Chinese consumers hardly the biggest proponents of recycling, whether it’s cars or banquet leftovers, Chen reckons the solution is in making the process as painless as possible. To that end, the would-be used-electronics magnate enlists thousands of stores and couriers into taking in unloved laptops and phones and developed an app that lets people turn over gadgets with a few finger-taps. Backed by e-commerce giant JD.com Inc., he’s set up an online bazaar to hawk second-hand products, according to Bloomberg.

Chen’s targets aren’t well-heeled urbanites pursuing the fanciest gadgets, but poorer rural users craving something capable. His seven-year-old company took in 5 million devices in 2016, just a fraction of the 400 million-plus new phones shipped in the country. But he expects business to double to over 4 billion yuan ($575 million) in 2017, when consumers who adopted 4G two years ago re-up with faster devices such as Apple Inc.’s 10th-anniversary iPhone.

“It’s virtually an untapped market. More than 95 percent of the potential demand is lying dormant,” said Chen, founder and chief executive officer of Shanghai Yueyi Network Co.

Most people are content to let their gadgets languish in drawer bottoms because there’s no easy way to deal with them, he said. That’s unlike in the U.S., where carriers and chains such as Best Buy run disposal programs. Those conditions create an opening for Yueyi and its Aihuishou app, which translates as “love recycling.” In December 2015, Chen struck an agreement with Xiaomi Corp. to run its trade-in program.

The global used phone market is worth $17 billion according to Deloitte, but in China demand is only just taking off, thanks to students and rural users who won’t pay top dollar but still want to stream video and play games. Device lifespans are lengthening along with better components, augmenting that trend, said Ra Mo, an analyst at Canalys in Shanghai. The researcher estimates that 41.1 percent of the 1.07 billion phones now in use within China will get replaced in 2017 -- a chunk of those will end up getting re-sold.

“Some buyers need a handset from Apple or other famous brand to feel good,” said Jin Di, a research manager at IDC. “There are also large numbers of people in rural areas that have limited knowledge about smartphones.”

While profit drives Chen, Yueyi helps address a simmering environmental issue. An electronic-waste crisis is emerging in nations where gadgets are becoming more affordable but lack systems to dispose of the lethal lithium, lead and cadmium embedded in them.

More than 70 million phones are discarded in China every year, with just a tenth of that making it to licensed recycling centers, according to Bloomberg BNA, citing 2013 data from the country’s IT ministry. In 2014, the country generated 6 million metric tons of electronic waste, almost three times Japan’s, according to UN-backed The Step Initiative.

About a third of the gadgets Yueyi collects are spruced up and re-sold. Cheaper phones head for the countryside and emerging markets. It doesn’t refurbish the components, so the rest are sold to scrap merchants who extract valuable minerals. That last step can be lucrative: a million smartphones can yield 75 pounds of gold and 772 pounds of silver.

The Aihuishou app has developed tests to identify types of processors, cameras and storage. Users help the software determine if screens or sensors are functional by drawing lines or covering up the light sensor. If they agree with quoted prices, they mail in their devices or arrange for pick-up.

A gently used 128-gigabyte iPhone 6 Plus can fetch 2,800 yuan for its owner, less than half the original sticker price. Xiaomi’s Mi5 can draw as much as 1,250 yuan, versus a new version’s 1,800 yuan.

Chen’s first startup, a barter website, failed in 2008. This time, his model’s won endorsement from local investors. In December, Yueyi completed a 400-million yuan financing led by Cathay Capital and Fortune Capital. Earlier backers include JD and Morningside Capital. Chen says Yueyi is profitable and could seek an initial public offering in China in two to three years, envisioning a valuation of possibly several billion yuan.

“Local investors can better relate to our business model,” he said.

Yueyi isn’t the only company to have lit on the idea. Alibaba Group Holding Ltd. has a used goods section. Smaller competitors abound, including classifieds sites such as 58.com.

Chen’s top priority is protecting his lead by extending Yueyi’s network of collection points into more remote areas. He plans to offer partner-stores a 20 percent cut on every phone sold, with the intention of expanding his web to 100,000 outlets by the end of the year. Yueyi now hires 1,200 people but wants to grow to 2,000 by the end of 2017, he said.

“We know our competitors are also eager to grab the market. If there’s a war, we are prepared,” he said.