A Gray Market for Electronics

Green Hills Mall, a shopping mall in Manila, is a huge marketplace of legal and semi-legal electronics leaked from supply lines throughout Asia. On first impression, it’s a surprisingly tolerated monument to backdoor commerce and insecure shipping.

But spend the day there, and something more subtle emerges. A middle class in Southeast Asia is creating one of the world's most promising emerging markets for electronics. But much of that market still isn’t capable of paying full price for digital equipment, and may not be for years.

Are malls like Green Hills simply thieves bazaars? Or do they exist and are they tolerated because they allow consumers in still-developing nations, like the Philippines, to gain access to the devices that put them on equal footing with richer neighbors? Is selling on the gray market today better than not selling at all, perhaps for decades?

Watch this report and decide. Comments welcome.

16 comments on “A Gray Market for Electronics

  1. Hawk
    December 21, 2010

    Marc, Just being naughty here but did you take advantage of this opportunity to pick up a few choice items yourself? I ask because the reason places like this flourish is because electronics sold there while potentially illegally manufactured, sourced or counterfeit are often much cheaper than the original and since everyone loves a good bargain few can pass up the opportunity to make a good deal.

    The authorities in Manila must believe the products sold here are all legal or they won't allow them. Or is it possible that there's some collusion going on here?

  2. Marc Herman
    December 21, 2010

    I would be surprised if the same police patroling the mall don't know they're involved in protecting illegal, or at least somewhat illegal commerce. But nor do I think this is so unusual. Green Hills may be for electronics what, for example, the huge dress market in downtown Los Angeles is for clothing. The gray market hides in plain sight. The question this raises for me is how the electronics industry should approach the seemingly contradictory need to 1) protect its supply chain, but 2) develop markets as fast as it can. The former causes problems for the latter. 

    I didn't buy anything at green hills. That wasn't out of some sort of moral indignation. Rather, I don't live in Manila, so if I bought something that broke, I'd have been out of luck.

  3. bolaji ojo
    December 21, 2010

    Marc, The scene you filmed is fascinating. It can also be replicated in other parts of the globe especially in Asian capitals. Bangkok is an example. More than 15 years ago, I witnessed a similar situation in Thailand and it's just amazing how little the situation has changed. For manufacturers and designers of electronic equipment, a great deal of the profit that is their rights have been siphoned off by counterfeiters. Is it possible to stop this? Certainly, not completely but the industry — and governments — have to find ways to at least drastically reduce it.

  4. mfbertozzi
    December 21, 2010

    Despite the ramp on business started few years ago in the Gulf region, similar situations are lived as “normal” especially inside “souk” at the border of big cities. Gray market represents the only sustenance for ethnic group not officialy recognized by local Govs, because of they haven't any chance for a legal work. Then, maybe, this could be one of the real issue to solve. Are we convinced local Govs in the Gulf and foreign Govs are pushing all together to address it definitely?

  5. Himanshugupta
    December 21, 2010

    I am confused with you choice of word “grey market” and not “black market”. Most of such items traded in open market or malls are either fake or imitation if the price is lower than 20%-30% (unless ofcourse they are on sale) as people generally do not pay sales taxes. The problem in buying these electronics from unreliable store is the risk of defected item or failure during (supposedly) warranty period.

  6. danmcmillen
    December 22, 2010

    I agree, probably more the known Black market versus commonly used Gray Market associated with component level purchasing.

    In many countries having people do work of any kind is valued versus letting technology and machines do it all.  I remember years ago being pick-pocketed across from the Roman Coliseum by a pack of young kids.  What struck me was the Policeman's response I saw while holding the arm of one of the kids, which was a simple look our way…realization of what was taking place, and looking back away to what he was previously doing.  I'm sure he probably was thinking “stupid American” and knows this was how these kids made their livelihood, just another service industry helping to grow the GDP.

  7. Backorder
    December 22, 2010

    I am much intrigued by your closing question. Is selling in these markets through a grey channel better than not selling at all? Or to provide a expand the thought, is it possible that some of the material is actually being sourced through legal channels just because this mode of distribution offers a wider reach? I have heard such remarks from people who have travelled and shopped around in these markets and some of them do share such opinions. Some of these traders have huge customer base and hence can purchase components in bulk volumes. They get cheaper prices due to this and they also offer stocking and MOQ flexibility. No wonder, small and medium size OEMs, EMS flock to these shops for their requirements. And if such customers number in thousands, no reason why such a supply chain cant sustain.

  8. eemom
    December 22, 2010

    You raise an interesting point.  It is totally plausible that companies are secretly supplying this chain in an effort to get it to a market that cannot otherwise afford it.  They can't officially lower their prices since that would hurt them in the rest of the global marketplace so they do it secretly so they speak.  That is a very grey area. 

  9. mfbertozzi
    December 23, 2010

    We could point out one aspect more. Travelling from here to there for my job, I 've met sometimes with similar markets and quite often products sold weren't compliant to OEM standards (i mean ROS and so on for example). Automatically gray market (or dark market) becomes the only way to sell them. Unfortunately, for poor people.

  10. Marc Herman
    December 23, 2010

    Interesting comments all, and thanks for keeping the conversation going on what feels to me a key topic. To answer some queries below, my impression is that the market is both black and gray market, but it's nearly impossible to tell what goods are legitimately constructed from overrun or otherwise second-line components, and which are straight-out stolen — either as finished goods that “fell off the truck,” or as goods constructed out of chips skimmed from a production run in a factory elsewhere. The prices were all over the place, so that might be the easiest way to distinguish black market from gray.

    Some vendors would negotiate way down on prices, as much as fifty percent. You've got to figure those are stolen goods, bought very, very cheap. The sales staff have some leeway to bargain, but not much. A boss sets the floor for the negotiations, and that boss presumably knows the origin of the goods, because he or she bought them from the source. Goods with narrower negotiating windows seem to me more likely to be traditional, semi-legal, gray market electronics. The have a more regularized supply, so probably have a more static value. If someone steals a shipment of iPads, the price of those black market iPads falls for a week or two, then rises when the thief moves onto cameras. By comparison, if someone sets up a regular, gray business making knock-off touchpads with second-rate chips, the price is whatever that business model produces, and probably doesn't vary as much. I saw more of the latter at Green Hills.

    As to the question of whether the producers tolerate this as a way to pry open a market, I'm hard-pressed to see how it could be otherwise. This is a huge, obvious, modern shopping mall in the middle of one of Asia's largest cities. And the same thing can be found, as several commenters have pointed out, across the region and the world. Some piracy is certainly just a matter of the police having their hands full. But shutting down Green Hills would be pretty easy: it's right there, as obvious as the Empire State Building is. So you can imagine Apple complaining to the Philippine government enough that they finally send some cops over there, check licenses at minimum. Except that doesn't happen. Or hasn't yet. So there's a reason to abide this for manufacturers, an eventual benefit larger than the short-term cost. In theory at least.

  11. Marc Herman
    December 23, 2010

    Oh, and in reply to an earlier comment, I lied, I did buy something at Green Hills. Or the guy I was with did, but not in the electronics section: my friend bought a pair of fancy Nikes, for about thirty dollars, that we figured should retail for over $100. This is significant to mention not so much to cop to — the shoes looked swell, I gotta say — but rather because it points up a basic difference in the electronics industry from other counterfeight goods. Shoes might not last as long as hoped, but they're not as dependent on their componants as a computer or other electronic gadget might be. Buying sneakers advertised as “factory overrun” represents collusion of some sort in the dilution of a brand (Nike). But selling a $30 hunk of fabric and foam is a hell of a lot easier than selling an $800 piece of electronics. And I imagine it's a lot easier to write off the loss of a container of shoes than it is a container of plasma televisions. Bottom line, of all the cheap stuff on sale that day, we bought the lowest-risk item, the shoes, even though the savings on high risk items, like a digital camera, were potentially hundreds of dollars. It's hard to fence electronics.

  12. Hardcore
    December 25, 2010


    It looks just like the SEG market in Shenzhen, just one point that many do not seem to have considered, and that is of 'return goods'

    When a customer returns goods in the west, sometimes these returned goods to not make it back out to the local market, rather they are 'contained up'  and shipped to 3rd world countries, or places like China , here they are re-labeled then sold on to middle men finally they are sold back into the market as 'new' goods, in some cases  suppliers actually sell them as new goods. Some well known  brand names take part in this trade, because ultimatly it allows them to clear out goods that would have to be scrapped off or sold as refurbished items in the west.

    Disposing of goods as recycled items is expensive, especially with the introduction of WEEE & ROSH, the cost of a 40' container is currently less that $1,000us far cheaper than any 'normal' method of recycling.


  13. Marc Herman
    December 27, 2010

    >Some well known brand names take part in this trade,

    Care to name names?

  14. Ms. Daisy
    December 27, 2010

    What is new? Its not different from “re-gifting” here in the US! Guess we call it re-selling, hopefully they are repaired before re-sale if damaged.

  15. Hardcore
    December 27, 2010

    Actually, much of this product is shipped to China for 'repair'. Why repair  at a cost that negates the reason to ship here.

    Far better to ship the product over, grade it then  'slide' it,  that is to say if it still works sell it to one market, if it does not work, slide it down a repair system as a job lot.

    Sometimes this 'product' finds its way back into the distribution chain of authorised distributors, where it is mixed as a % with genuine goods stock. 

    Certainly on Disk drives, I was 'lucky' enough to see one of the reprocessing centers, labels removed ,firmware re-flashed, and Smart data erased to give the appearance of new product. Surely a manufacturer would know a supply chain reseller could not possibly need that many refurbished drives.

    This business was so much of a problem the the China customs department introduced laws and charges to negate the trade, specifically by setting a time limit and chargeback system onto any business, taking product back for 'repair', the material is generally given 30 days to re-exit China, after that a scalable charge system is introduced. 



  16. saranyatil
    December 28, 2010

    according to me these gray markets present in places like bangkok, china become great resource for people who want to procure high end electronic gadgets at a lower price this places create a sense of satisfaction amoung the consumers that they own such a high end brands at their desk or in their pockets. also they are not original this in turn spoils the economy of the country and also the companies reputation once it gets spoiled there will be no longer genuineness in regard to the product nor the company. these markets should be abandoned forever.

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