If that were the case, you could get around the GPL by claiming to sell CDs, thumbdrives, or zip files. Including software in your hardware product is undeniably distributing that software, IMO.
I disagree. If you sell me a CD with software on it, I have the software. If you sell me a car that runs a software internally, I have a car, but not the software. The car, unlike the CD, is not a container for the software. In fact, there is no trivial or intended way to get the software out of the car. As I said, GPLv3 addresses this explicitly, but with GPLv2 the license just doesn't apply. Then again, lots of people strongly dislike GPLv3, possibly exactly for this reason.
Incidentally, if you send me a USB stick with some GPL software on it, I can demand that you give me the source code of that software. However, I can not demand that you also give me the source code for the firmware of the USB stick, even if the source code for that firmware is under GPL (v2)
