Gray marketing


Managers of international brands must learn the necessary skills to promote their brands, and solve the problems in international market. Due to the development of the global market, the gray market has been the one of the main market of the globalization. Gray market is a market employing irregular but not illegal methods (Webster, 2004); especially the unauthorized distributors sold the product at discount prices. Unlike black market goods, gray market goods are not usually illegal; instead, they are sold outside normal distribution channels by companies which may have no relationships with the producer of the goods (Wiki, 2006). In a recent survey, Myers (1999) discovered that gray market activity has become global, occurring not only in less developed or volatile markets, but also in many well-developed markets. The international gray market usually happened when the price of an item is significantly higher in one country than another. This situation often occurs with electronic equipment such as mobile phone, personal computers. Since China has become the one of the largest potential market in the world, the gray market of China is growing very fast.

This paper is focusing on the gray marketing of China mobile phone industry. Gray market handsets, which are characterized by a fake International Mobile Equipment Identity (IMEI) number and carry no test and quality assurances or network entry permits, and are not recognized by the Chinese government (iSuppli, 2009). According to market research film iSuppli, the global mobile phone market have been flooded with 145 million gray devices by the end of 2009, as the market for unlicensed handsets reaches almost 13% of the size of the legitimate sector. In these 145 million gray market goods, about 110 million gray market handset units were exported from China, considerably up from 60 million unit in2008. Wang from the iSuppli, the research company, said that "Chinese gray market handset suppliers have become so successful that they are grabbing share from major international handset OEMs."

Gray marketing has traditionally been viewed as a serious problem for the authorized distributors (Ramirez, 1985); and for brand owners and customers, gray marketing does not appear harmful in the short term, both parties are adversely affected in the long term (Palia and Keown, 1991). However, they do not offer any practical evidence for this claim. On the other hand, the recent research (Lim, Lee and Tan, 2006) shows the different view of the gray marketing; they are claimed that the brand owners can treat the gray marketing as an alternative market entry strategy and not merely a marketing or legal problem.

Thus, the aim of this paper is to stand as the brand owners' view, considering with Chinese customer behavior and authorized distributors, to measure whether or not the brand owners in the mobile phone industry, can use the gray marketing as a marketing entry strategy to expend the Chinese market, and in what kind of situation, the gray market can bring the damage to the brand owners.

This paper will take insight research of mobile phone industry in China, and also present the case study of" iPhone in China" to measure the influence of gray marketing for the brand owners. In the case study, this paper will measure consumer attitude toward gray market iPhones and to examine factors that affect such attitude.

Based on the analysis of the research data, the Apple Plc can make the proper strategies for the Chinese market.

Literature Review

Gray marketing

Gray marketing has been a widespread international practice, it is said to occur when authentic branded products reach the customer through marketing channels other than that of the authorized distributors (Weigand, 1991). When gray marketing occurs across markets, such as in an international marketing, it provides the opportunity for unauthorized distributors to bypass official franchise holders or agent for particular, usually high-priced, branded goods and to source them direct from overseas suppliers. This kind of activities are usually not restrict by the law, it is only illegal when gray market goods violate either product regulations or a licensing number for the trademark's use in a specific country, or where the trademark owner is based in the country into which parallel imports are shipped. If the unauthorized distributors want to operate the gray market of some products, it must be a source of supply, easy to access from one market to another, and most importantly, the price differentials that are large enough to make the potential profit (Eagle, Kitchen, Rose and Moyle, 2001). Some arguments (Malueg and Schwartz, 1994) focus on whether gray marketing is a legitimate response to discriminatory pricing strategies or a free rider problem. Finally, no company will engage in gray marketing unless it is profitable ( Lim, 1996)

The cause of the gray marketing

Firstly, the prime cause of the formation of the gray marketing is the price differential of same kind of goods in different countries. There are mainly have four reasons caused the situation:

1) Consumers in different countries at different levels of income and consumption will have the various demand conditions for products that can cause to a different price.

2) Exchange rate fluctuations can also cause the price difference. Gray marketers are buying the products from weak-currency countries, then selling the products to the strong-currency countries, and earning the profit from those activities. For example, in the year of 1984 and 1985, U.S. dollars continue to rise, gray marketers from Scotland, Belgium, and Japan bought the products in local currency and shipped to the United States, and then sold the goods at fixed prices in U.S. dollars. The gray marketers have attracted a large number of customers because the price of their goods was obviously lower than the white market goods. The Anti-Gray market Alliance (AGMA) report shows that the international price difference of a crawler excavator can reach as high as 20 million U.S. dollars in that period. On the contrary, when the Yan continue to rise while the U.S dollars become weaker during the year of 1987 and 1988, many Japanese products have been imported into Japan from the U.S. market.

3) Large volume discounts of the product will also attract gray dealers. For example, IBM's volume discounts on their personal computers reached its highest at 30 ~ 40%. Some authorized distributors want to enjoy the discount benefits as much as possible, the actual quantity order they made may be more than the real sales volume in the area. Thus, the authorized distributors have to sell the excess part of the orders to other countries with lower price through the non-authorized sales channels.

4) The manufacturer planned the price differentiation strategy in different markets in order to obtain the maximum profit. This market strategy may cause the gray market formation. Usually the pricing information are separated by the manufactures from each market, however, as the rapid development of communications technology in modern society, the pricing strategy cannot be used very well.

Secondly, the gray marketers keep selling the products at a lower price is the another reason to make the gray marketing activities flourish. Usually the authorized distributors will have the higher cost of sales because of the fixed sale lactations, facilities and personnel, the need for commodity advertising, to carry out a variety of other promotional activities, with the necessary inventories, and provided maintenance and other after-sales service, etc. On the other hand, the unauthorized distributors just need few marketing facilities and do not need to spend much money on advertising, so its cost of sales is lower than the authorized distributors which can make themselves more profitable.

Thirdly, with the huge development of the global market, the international trade activities are become easier for the company since the tariffs and other barriers are decreased. It creates the conditions for the gray market activities.
Fourth, Modern information communication technologies allow the rapid development of gray market dealers can get the price information quickly and get the goods around the world inexpensively. The marketing opportunity that presents itself requires gray market goods to be priced lower than goods sold by the authorized distributors or domestically produced goods ( Dutta, 2006).
Fifth, in many countries, the law does not prohibit the gray market activities. For example, in EU countries, Roman MA Law Article 83 and Article 86 prohibits to restrict the free trading activities between member States. This makes the gray market activities in the EU countries is legitimate. For example, the United Kingdom Parker Pen company had tried to prevent its Germany partners sold their products back to the United Kingdom through legal means, this activity were treated as to breach of the principles of free trade by the European Commission; the company was fined for 700,000 ECU (Viscounty, Risher and Smyser, 2001). In recent years, some Asian countries like South Korea also do not prohibit the gray market activities. This is also a factor to promote the development of the gray market activity.

The impact of gray marketing

For manufacturers, the gray market activity may assist the company to expend the foreign markets or increase the overall market share of the products (Mitchell, 1998). Although the manufacturers may be forced to adjust the market price, but objectively, the gray market activities will make the market price of the company's products become competitive. Especially for those products which do not need to provide specialized after-sales service or the products which need the after-sales service but can be easily obtained from other ways, gray market may not affect the image of the company and its products, it may lead to increases of company sales(Tan et al, 1997). Because of this factor, some manufacturers think that the gray market activity is not really a problem.

However, there also have some disadvantages for the manufactures:

1) Brand owners cannot maximize their profit by using the global price differentiation strategy due to the globalization. A variety of forces which including falling trade barriers, the information explosion on the internet, and the modern distribution capabilities will affect the company's ability to pursue local pricing strategies.( Hollinger and Buckley, 1998)

2) The gray market will cause the company's products compete with each other of the same brand in the market, especially sale price of the unauthorized distributors is lower than authorized selling price of the product, it will be a serious problem for the authorized distributors. In the long run, the company may lose the stability of the sales channels.

3) Since the unauthorized distributors usually do not responsible for after-sales service, which could cause the customer dissatisfaction, it will also affect the image of the company and its products (Maskulka and Gulas, 1987). If the company provides the grantee services for the gray market goods, it will definitely increase the costs of the company. On the other hand, for many industrial products, the after-sales service is also an important source of income, and sometimes may even exceed the profit of goods itself, however, most of the gray goods buyers do not know the company provide the services, it will make the company lose some after-sales service benefits.

4) Gray market activities may make the company products in an oversupply situation in some areas, the company have to cut the price of products, therefore, it will also affect the company's overall revenue.
For authorized distributors, Buchanan et al (1999) provided that it is retailers rather than manufacturers who often control a brand's final presentation to customers. Before the authorized distributors come into market, they also benefits from the advertising and promotional activities undertaken by the gray marketers. After that, the gray market activities will usually affect the sales of their products, especially when they spend huge amount money on the promotion to expend the market while the gray marketer also benefits from that.
For customers, customer may enjoy the low-cost benefits of the gray goods. Some gray marketers will sell the products with lower price in order to attract customers. In fact, whether the customers buy the gray goods, gray
market activity itself will put pressure on normal commodity prices. In the long run, consumers can benefit from the gray market. Objectively, gray market increases the sales channels for customers who can easy to buy the product. However, gray market activities for the customer may also have the following disadvantages: Customers may buy the gray market products without being aware of the difference between these goods and those purchased through the official authorized distributors. And customers may not understand the instructions of gray goods that provided with other country's language. Since the gray marketing may represent an unusual approach to market segmentation, with low priced goods from gray dealers who do not offering the same warranties as those official products with higher priced goods available through official channels. The customers may cost higher prices for the security of warranties and after sales service. ( Mitchell,1988)

Global strategy and Market entry strategy

The company will make the global strategy for the products to expand the international market. Zou and Cavusgil (2002) identity three perspectives of global marketing strategy: the standardization perspective, the configuration perspective and the integration perspective. In practice, the managers of international films are required to use the global strategy that are appropriate to their own situation, and seeking the balance between the different degrees of standardization or adaptation of the various elements of the international marketing process.

In table 1, it shows the several elements of marketing management. These elements should be seen as being at different points of a continuum of standardization, where the product and service image is generally easier to standardize than individual country pricing.


Sales force

Sales promotion





Table1 (Source: Global marketing...)

The recent research shows that the gray marketing can be an alternative market entry strategy for entrepreneurs (Lim, Lee and Tan, 2006). Tan et al (1995, 1997) argued that it is more appropriate to look at gray marketing not as a price discrimination problem but rather as an issue in free-riding and that fighting gray marketers is not always the optimal response for the authorized distributors. So the brand owners can use the gray market as the market entry strategy.

Research objectives and method

Even though there are many researches focusing on the positive and negative part of brand owners in gray marketing, there is little research of the when and how the brand owners can earn the benefit of the gray marketing, and in what specific time the gray market can bring the damage to the brand owners. The real issue is the relationship between the brand owners, customer, authorized distributors and gray market dealers. As we have seen in the proceeding literature review, there is a massive academic research focusing on the cause and consequences of the gray marketing rather than providing objective, quantitative analysis of the impacts of the brand owners that caused by Chinese customers behavior. Palia and Keown (1991) review that, although the brand owners and customers in the gray marketing do not appear harmful in the short term, but they are adversely affected in the long term. However, Palia and Keown do not provide any practical evidence for their opinion. And they do not mention what the main factors that affect the customers to choose the product from the gray market or authorized distributors. Therefore, it is time for a research to be carried out to tackle some of these issues in the Chinese marketing. Under the previous researches of the Chinese gray marketing, the objectives for the research have twofold:

1) To explore the opportunities of the brand owners to expend the Chinese market by using the gray market. According to the China's actual condition, the brand owner should make the proper market entry strategy to adjust the Chinese customer behavior in order to expand their market share.

2) To determine what actions can be taken to counter the negative impact of the brander owners.

In this paper, the gray marketing is explored only in the China's mobile phone industry. In order to get the sampling more specifically, we are taking the "iPhone in China" as the case study. We are taking the sampling customers who buy the iPhone from China's most famous website-Taobao, like EBay, which is the one of the largest customer purchasing website in China. In this website, most of the sellers are unauthorized distributors of iPhone, and nearly most of the iPhones from gray market.

The researches are divided into two parts: in the first part, we are interviewed 15 customers who buy the iPhone from gray market with 5 opening answer questions. These 5 questions will question customers the reasoning to buy the iPhone through the gray marketing from five areas: price, quality, legitimate, grantee and risk, and brand awareness. In the second part, it will take the 100 Chinese mobile phone users by random to test the Chinese customers willingness to buy the iPhone. It will also take the survey on the website to consider the main factors that affect customers choose the iPhone from gray market or China Unicom.

Research findings,analysis and interpretation

Threat to

Unauthorized distributorscheaper price

Internet sellers and othersrisk of grantee

(Nokia, Sony Ericsson, Google)

(Table 2: The relationship among five parties in iPhone case)

It can be seen in table 2, there have five parities in the mobile phone market: Apple plc as the brand owner and manufacturer of the iPhone, China Unicom as the only authorized distributors in China, the Internet sellers and other gray dealers as the unauthorized distributors, other mobile phone companies such as Nokia, Sony Ericsson as the market competitors to the Apple plc and finally, the customers. They are all connecting with each other, influencing each other.

Since the Apple plc started to sell the iPhone in American on 31/06/2007, until the iPhone officially enter into China on 31/10/2009, the iPhone have already been taken 2 years and 4 months come into China. However, during this "blank marketing" period, some unauthorized distributors starting to appear in the market. They are mostly buying the iPhone from other countries, get it decode and resell it to the Chinese customers. The most common way that they sell these iPhones are through the Internet.

Obviously, during this period, before the iPhone officially sold in China, there just have three parties: Apple plc, the unauthorized distributors and customers.

The figure 1 shows that sales volume of iPhone in two periods: before the iPhone officially sold in China and after that. As it can be seen, from 01/07/2007 to 31/10/2009, the gray dealers have already attracted nearly 15 million customers during that "blank marketing" period.

After the iPhone officially come into China, another two parties are come into the market: the authorized distributors and the market competitors. When the iPhone first come into the market in 2007, the "smart phones" are not popular in the mobile phone market, however, in 2009, most of the mobile phone companies have exploited the different kinds of smart phones for customers. Due to the existing 15 million "non- official" iPhone users, and other mobile phone companies are already have the market share of the smart phones, the sales of iPhone through the China Unicom are just 3 million in first two month, which is obviously lower than the predict sales volume.

After the China Unicom finally gets the authority from the Apple Plc, the research is focus on whether the customer will buy the iPhone from China Unicom. During the research, we are taking the 100 mobile phone users by random. As it can be shown in table 3, over 50% mobile phone users want to buy the iPhone from China Unicom. However, about 24% of mobile phone users already buy the iPhone from gray market. In this situation, at least 20% of market share of the iPhone has been taken by the gray market.

Research findings for the customer behavior

According to figure 1, it is obviously that, during the "blank "period, the unauthorized distributors have already sold about 15 million iPhone in China. The most advantage of these unauthorized distributors is the iPhone is not officially entered into the market of China.

During the depth interview of customers who purchase the iPhone before it officially enter into the market, there are have three main factors to affect their choices:

1) Time: In recent years, China has become one of the largest purchasing countries in the world. With the Apple Ltd worldwide advertising, iPhone has been one of the most popular mobile phone around China. Since the iPhone start to sell in American on 31/06/2007, Chinese customers are hoping the iPhone officially come into China as soon as possible. However, since the process of China Unicom gets the authority from Apple Ltd take so long, the Chinese customers are already losing their patience during that period. At that time, the gray markets are actually satisfying the customers' desirable for the iPhones. After the Chinese customers know that iPhone can not officially be sold in China in a short time, Chinese customers start to choose purchasing the iPhone through the gray market. In the depth interview of 15 customers, 71% customers choose to buy the iPhone within 3 month.

2) Quality: Normally, the products sold in gray market are completely the same as those sold through authorized channels. The gray marketers usually claimed that their iPhones are the "official" edition from the other countries, so it is the same quality comparing to the other countries.

3) Grantee: Even though the unauthorized distributors cannot provide the official grantee for the customers, they are still promise the at least one-year "non-official" grantee to the customer. Finally, with considered the other two factors, the customers are obviously buy iPhone from gray market.

Overall, considering with all these factors, before the iPhone officially enter into Chinese market, the most important factor that affect the Chinese customer to purchase the iPhone from gray market is the time condition. About 90% customers in the interview can not wait over 3 month to buy the iPhone; they all have passions on the iPhone. The Global advertising of the Apple plc have giving the Chinese a strong idea of the Apple's product, eventually, they think the iPhone represent fashion, a high quality life-style. The Chinese customers have the high product-class involvement of iPhone. Product-class involvement represents the average interest a customer has in a product category on a daily basis (Caichkowsky, 1985), which may be a variable that importantly moderates customers' purchase intentions. Thus, the high customer involvement of iPhone has arising much of the Chinese customers' purchase intentions. The gray dealers are actually satisfying their purchase intentions.

In the second stage research, the research is focusing on the Chinese customer's attitude to choose the iPhone after the China Unicom get the authority to sell the iPhone. One multiple-choice question to test the main factors that affect customers to buy the iPhone was post on the Chinese research website, which is the biggest on-line survey website in China. According to the returned 188 respondents, 66 percent mentioned lower price, 83 percent mentioned quality concerns, 32 percent mentioned guaranties and risk and 10.6 percent mentioned legality. Consequently, these four factors may influence Chinese customers' attitude to choose the product.

(Figure2: Factors that affect customers)

			    Official products( China Unicom)                  Gray market products(Internet-from taobao)
Time to entry              2year and 4 month                                          1month
Price                      Nearly 20% higher                                          Lower 
Function                   Without Wi-Fi                                            With Wi-Fi
Grantee                    1 year                                             1 year, "non-official"
Risk                       No risk                                        The personal details may lose
Legitimate                 Yes                                                       May not

(Table 4: the comparison between the official products and gray market products of iPhone)

Price: price plays an important role to the Chinese customers. Comparing to the IPhone from the gray market, the price of official iPhone is nearly 20% higher. The research results have shown that 66% concerned the lower price. The Chinese customer usually use the price in the authorized distributors as a reference price is plausible, therefore, the gray market can take advantage of lower price to attract consumer's interest. In most situations, the price difference is an important factor when the customer purchasing the iPhone from gray market.

Quality: Chinese customers usually believe that "high price, high quality", however, in the official iPhone that sold by China Unicom, the iPhone has lost the one of the most important function: Wi-Fi while the iPhone from gray market have. Many potential customers may transfer from China Unicom to gray market by losing this important function.

Risk: The gray market increases the opportunity for the entry of black market goods (Lowe and McCrohan, 1989). When a customer make a purchase decision, "risk" implies " greater consequences of making a mistake" and "degree of inconvenience of making a mistake " (Batra and Sinha, 2000). The multidimensional nature of perceived customer risk involving the performance, financial, safty, social, psychological and time/ opportunity dimensions (Havlena and DeSarbo, 1991). Customers who purchase goods from the gray market may take a higher risk of the products. According to the recent report (China Daily, 2009), the iPhone from the gray market can cause the customers lose their personal details. This serious problem will cause the gray market lose their customers.

Grantee: The iPhone from the gray market may loss the warranty and service from the legitimate distributors. Most of iPhones are from the other countries, gray marketers need to get the programs decode and then resell to the customers. This will cause some programs run in wrong way. And most of the gray marketers just can provide their own warranty and service; they cannot provide the official warranty. In other words, if a customer who wants to fix the iPhone that purchasing through the Internet from gray market, the customers have to send the iPhone back to the gray dealers, and let them fix it. There will be the risk of grantee.

Research findings for the brand owners

The market research film iSuppli noted that gray market activities have caused the mobile phone company substantial losses in sales up to 30 percent. In the previous literature, most brand owners believed that the gray market will bring the potential negative impact to them in the long term. The major concerns related to the lowering of the price and incomplete grantee of their products being brought in by the gray dealers. However, according to the feedback of the customers who buy the iPhone from gray market, it shows that there is little negative impact on the Apple Ltd.

The comment shown below:

I trust the quality of iPhone, because Apple Ltd is one of most famous technology companies in the world. No matter whether the iPhone that I brought is "official" or "non-official", it will not affect my passion on Apple' product.

According to the customers comment, most of the gray market customers want to buy iPhone because they have passion on this product, and the most important factor that can affect the Chinese customer is the brand recognition. The more famous of the brand, the more passion that the customer want to purchase the product. Whether the customer buy the iPhone through the China Unicom or the gray dealers, will not affect the brand itself.

Even though the Apple Plc will lose the market share of the iPhone, the Chinese customers' attitude is still staying positive for the brand.


There is no doubt that gray marketing can take some market share away from the brand owners. However, from the responds of Chinese customers' attitude, the brand itself is not always getting the negative impact in the long term. In the iPhone case, the gray market can be an alternative market entry strategy for Apple Plc. The gray market forms about 15 million iPhone users in China, and also arises the Chinese customers' interest to buy the iPhone.

The sales competition between the gray dealers and authorized distributors is actually kind of expend the market share of the brand; it will increase the Chinese market share for Apple Plc.

In this paper, it identified the main factors that affect customer to purchase the iPhone before and after the iPhone officially sold in China. This case study provides that the practical illustration of what the main factors that the customer concern in the market. It indicates that brand owners

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