In brief: Most large companies have to deal with warranty fraud, but the problem has been so bad for Apple that it's cost the firm billions of dollars. A new report reveals the ways that Apple’s policies were abused in China, which involved returning iPhones to stores after their components had been swapped out for fake parts.
The Information writes that in 2013, Apple noticed its store in Shenzhen was receiving more than 2000 warranty claims per week—more than anywhere in the world and three times higher than its flagship Fifth Avenue store in New York.
Following an investigation by the company, it was discovered that gangs of criminals were buying or stealing iPhones and replacing the parts with fakes and even chewing gum wrappers. They would then return these “Frankenstein” handsets and request warranty replacements, at which point they would sell both the removed components and the new iPhones.
The prevalence of knock-off iPhone parts in the region, along with the triad gangs, allowed for thousands of fraudulent replacements at the Shenzhen store, causing Apple’s warranty claims costs to skyrocket. "Apple set aside $1.6 billion at the start of its fiscal year for global warranty claims, but ended up spending $3.7 billion on them in the period, according to the company's annual report for that year," writes The Information.
Apple tried to tackle the practice by introducing an online reservation system that required proof of ownership before repairs were carried out, but hackers managed to get around these protections. It then tried performing diagnostic checks on iPhones brought into the store to identify fake parts, but the fraudsters made sure the phones wouldn’t turn on.
Apple eventually stopped warranty replacements taking place in its stores; instead, the iPhones are sent to distribution and repair centers where they can be thoroughly checked. It also uses an invisible dye on batteries and waterproof sealants on its chips. All of which have dropped fraudulent rates from 60 percent down to 20 percent for all warranty repairs in China. Warranty expenses, meanwhile, fell for the first time in 2017, down to $4.32 billion from $4.66 billion a year earlier.