In this post we take a closer look at grey market goods and China. First we will consider what grey market goods are and why manufacturers get so worked up about them and then we will look at how China regulates grey market goods.
1. What are grey market goods, and why do they matter?
Grey market goods are authentic goods sold by unauthorized means. Unauthorized does not necessarily mean illegal; it simply means the goods are coming from someone other than (1) the original manufacturer or (2) a third party to whom the manufacturer has granted permission to resell the goods.
E-commerce has made all manner of grey market goods readily available. When I purchase Gillette razor blades on Amazon for delivery in the United States, it appears that the cheapest sellers are offering grey market blades packaged for sale overseas (typically, Asia, Eastern Europe or South America). Though it is not clear that these blades are exactly the same as what I would buy in the United States, the price difference is significant enough that I’m willing to take the chance. And that’s just one example.
Any product priced significantly differently in price or availability across different countries is likely to be sold on the grey market. And the flow of goods can go in any direction; it just depends on price and the demand. As China’s consumer class has grown in strength, so has its market for grey market goods. Products as disparate as Apple’s iPhone and Pfizer’s Viagra did significant business in China as grey market goods before they were officially available there.
Many years ago, Costco purchased large quantities of Omega Seamaster watches from an authorized reseller in Europe, then resold them in the U.S. as grey market goods. Because the prices in Europe were so much cheaper than the retail prices in the United States, Costco was able to add its usual markup and still price these watches at a substantial discount. Omega sued, but after a protracted battle, Costco prevailed in 2015.
Grey market goods exist because there’s a market for them. Grey market goods are either cheaper than the goods available through standard channels (e.g., the Omega watches at Costco and the Gillette razor blades on Amazon) or simply unavailable through standard channels. A reasonable argument can be made that grey market goods are in fact good for many manufacturers, because they increase both brand recognition and product loyalty. And profits! Grey market products have been sold by the manufacturer at a price (if not a use) they deemed acceptable.
Nonetheless, grey market goods are often decried by original manufacturers for reasons including the following:
1. Grey market goods are often difficult to distinguish from counterfeit goods, which harms the reputation of the brand and the manufacturer.
2. Grey market goods are often customized for the particular market for which they are made, and are unsuitable for use in other markets. This too harms the reputation of the brand and the manufacturer.
3. Grey market goods often have different warranty protection — or none at all — when sold or used outside the market for which they were made. This causes customer frustration and dissatisfaction.
4. Grey market goods sometimes are of lower quality (hence the lower price), which harms the reputation of the brand and the manufacturer.
5. Grey market goods often interfere with the business expectations of the original manufacturer and its licensees.
2. How Does China Regulate Grey Market Goods?
One of the minor mysteries of modern China is how every mall has so many luxury-brand stores that seem never to have anyone shopping inside. I’ve read numerous explanations for this disparity, none of them entirely satisfactory: the shops are loss leaders in an effort to build brand loyalty in China; the shops are highly subsidized by mall owners to bring in other tenants and/or to give them face; all of the shops’ sales are made after hours to Party officials’ relatives and mistresses; people just aren’t paying attention at the right time.
But one answer for the empty stores, surely, is the enormous size of China’s grey market for luxury goods. Grey market goods exist because there’s a market for them, and that market exists because grey market goods are either cheaper or have better availability. But in China there’s a third driver of the grey market: quality. It’s ironic because in the US, grey market goods have a strong whiff of caveat emptor; if you buy a product outside the normal channels you accept the risk that it might be lower quality. But in China, the calculus is flipped: because counterfeiting is still so rampant, the chance of buying a fake is considered to be lower if the goods come from overseas.
Historically, a significant proportion of grey market luxury goods in China have come via daigou, personal shoppers who live or travel overseas and purchase luxury goods for well-heeled clients in China. I’ve seen this in action: at Seattle Premium Outlets’ Burberry Store, you sometimes would have to wait in line just to get in the store, only to be ignored when it becomes clear you’re not there to drop twenty thousand bucks. With COVID making such cross-border trips either difficult or impossible daigou activity has plummeted.
Other grey market goods in China are purchased directly by consumers, either while traveling overseas, or from foreign reseller sites like eBay or Amazon or Walmart. Grey market goods can also be found on Chinese e-commerce sites like Taobao and 1688.com; these goods are usually purchased “on spec” overseas and then resold in China. Baby formula and iPhones have, at various times, been popular grey market goods in China.
Grey market goods are legal in China, or at least are not considered to be an infringement of the brand owner’s IP rights.
On a certain level, foreign brand owners might not be all that concerned about grey market imports in China – a luxury shoe company gets paid whether its pumps are bought in Shanghai, or bought in Las Vegas and then shipped or taken to Shanghai and resold. But for several reasons, there should still be concern. First, the luxury shoe company may want to be seen as cooperating with the Chinese government on tax and customs issues. Second, having to deal with so many purchases by Chinese travelers overseas can distort the company’s worldwide marketing and revenue stream. Third, the reselling of their shoes increases the amount of intermediation between brands and their consumers, which is exactly the opposite of what most consumer goods companies typically want. How can you market to customers when you don’t interact much with them? And how can you control your brand identity when you are not the seller?