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I had dinner Sunday night near the Olympic Stadium (The Bird’s Nest) with two savvy expats Steve McIntosh and Mike Forbus. Both are Apple fans and they have been following mobile telecom and tech in China closely. I owe Steve a particular debt of gratitude for passing along insights to the goings on in Beijing/China and how they relate to iPhone.

I was sharing my impressions of Beijing with Steve and Mike and the subject turned to the game of dodge ball in the streets between cars, pedestrians, bicycles and modped-like contraptions. Fortune favors the bold and so does the right of way. Never take for granted that a car will stop if you’re in the path … I’ve had to hop to safe ground on several occasions. Cars will generally stop for traffic lights, but not much else. Mike noted that there are no stop signs in Beijing. Huh? “No way” I thought. Then I realized he was right. Despite the tens of thousands of streets in Beijing, only the primary intersections have lights. When it comes to the secondary and side streets, better to just keep traffic moving (no stop signs) … it’s whomever merges first. It dawned on me last night that “no stop signs” was the perfect metaphor for grey market and Shanzhai ji sales in China.

A few grey/black market definitions might be helpful …

Grey-market sales = real brand goods sold illegally (e.g. a real iPhone sold through an unauthorized vendor). Some might call this a “black market” since seemingly all variety of goods in China are commonly sold through unauthorized vendors and no taxes or licensing fees are paid to the government on these under the table sales. Many in China prefer the term “grey-market” verses black-market as there are “no stop signs” from the government regulators … they simply look the other way. If a rule is not enforced, is it really a rule? Some would say no. If you never get a ticket for jaywalking, then it’s not really breaking the law, is it? Or so the argument goes. The millions in China who are involved in the sale of grey-market goods through unofficial channels believe that they are not breaking the law, albeit they might admit that they are operating in a “grey zone” (neither black nor white) and they don’t want to tempt fate by being too brazen. They get nervous when you take pictures.

Why are rules against illicit sales never (or rarely) enforced in China? Just my theory, but here are severals possible reasons …

1. The grey-market economy is simply too big to effectively corral.
2. Shutting down this segment of China’s economy would put people on the streets and could lead to dis-harmony/unrest.
3. Corruption … yep, officials often get a slice of the action and the second oldest criminal activity is alive and well in China. Come bearing “gifts” (a much better word than bribes don’t you think?) and it’s easy for officials to look the other way.

Shanzhai ji goods = Counterfeit goods, sometimes also called “village brand” or “bandit brand.”  Shanzhai ji (“Shanzhai” culture is a rebellion against the monopoly sectors) goods are everywhere and these cheap knock-offs cross the boundary of imitation and into the realm of outright rip-off. It’s not just electronics, mobile phones, watches, and Gucci bags that get “cloned” … you can also find Shanzhai toilet-paper, Shanzhai bottled water (un-filtered tap water in un-sanitized recycled bottles with a phony brand-name label), Shanzhai condoms and Shanzhai (recycled) cooking oil.

Shanzhai ji mobile phones = counterfeit mobile phones a.k.a. “bandit phones.” While there are many Shanzhai ji iClones (iPhone look-alikes), no major manufacturer is immune to the bandit phone phenomena.

The Shanzhai (“bandit phones”) market in China has grown exponentially in the last few years. Virtually all brand name phones have a Shanzhai ji look-alike. Government authorities will admit that approximately 25% of all phones sold are a combination of grey-market sales and Shanzhai ji knock-offs, but the real numbers may be closer to 40%. The Shanzhai ji economics are compelling. A Shenzhen bandit phone entrepreneur can drive his Ferrari over to Hong Kong and acquire chipsets and components from MediaTek and other suppliers and quickly set up an assembly line. These backroom operations often sprout up and disappear in a matter of months. It only takes a small team of engineers a few weeks time to prototype their next bandit phone. A Shanzhai entrepreneur might knock out a phone for about 300 CNY ($44 USD) and sell it for 600 CNY ($88 USD) with no pesky government taxes or licensing fees to cut into the fat profit margin. If the entrepreneur sells 23,000 units, he is now a millionaire. The bandit production operation will then shutdown only to appear again in another obscure warehouse. Rinse and repeat.

Of course you get what you pay for. I had an iPhonAsia reader write to me recently to complain about the “iPhone” she purchased while on holiday in Shanghai. It had poor audio quality, a screen freeze problem, and after six weeks of use, it no longer worked. When I wrote her back inquiring about how/where she came to buy this phone, she confessed that it “really looked like an iPhone” but when she took it to the Apple store, the Genius instantly recognized she had purchased a counterfeit iClone. “Ah, that explains why it was so inexpensive.” Yep, there’s one born every minute.

Can you tell the real versus Shanzhai ji iPhone? Find out > HERE

iPhonAsia Travelogue series (Beijing, Shanghai and Hong Kong):

• iPhonAsia Travelogue Part 1: Wheels down in Beijing
• iPhonAsia Travelogue Part 2: Getting Oriented in Beijing
• iPhonAsia Travelogue Part 3: Into the heart of darkness – shopping the Beijing iPhone blackmarket
• iPhonAsia Travelogue Part 4: No stop signs in Beijing – The Shanzhai ji counterfeit culture
• iPhonAsia Travelogue Part 5: Secret rooms with hidden Shanzhai treasures (Shanghai)
• iPhonAsia Travelogue Part 6: Warming up in Hong Kong
• iPhonAsia Travelogue Part 7: The Hong Kong iPhone market

Tags: Black-market, bribes, China, corruption, counterfeit, gifts, gray market, grey market, iPhone, Shanzhai ji