The Unforeseen Gray Market and Surging Demand

Key Insight

A lucrative gray market for iPhones emerged in China as early as summer 2007, a year before the first official store opened, with units smuggled from countries like the US and Hong Kong (which lacked sales tax). These phones sold for 8800 yuan ($1170), more than double the US price of $499, and a single iPhone could yield a month's salary for an urban Chinese worker earning around $2 per hour.

Apple initially misjudged China's market, classifying it as a 'third priority' market below countries like Argentina, believing high-priced Macs and iPhones wouldn't sell significantly given urban wages of approximately 2500 yuan ($370) per month. Their pricing strategy, converting US prices one-to-one and adding taxes and buffers, resulted in products like the iPod being 30 percent more expensive (e.g., $499 US to 4988 yuan or $647).

Demand exploded with the iPad launch in September 2010, leading to a record $3.7 million in sales in cash within five hours at Sanlitun, exhausting inventory. The iPhone 4 launch saw similar frenzy, attracting 'yellow cows' – organized scalpers who, with vast cash reserves (Ford estimated seeing $1 billion in one room), hired hundreds of migrant workers for about 100 yuan per device to acquire thousands of iPhones and iPads, effectively becoming Apple's unofficial distribution network across China.