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Tim Worstall is an Englishman who has failed at many things. Thus his turn to writing, the last refuge of many who could make a living no other way. He is, as an example of his business and financial perspicacity, the head of the international scandium oligopoly: the only commodity which has not risen in price in the past decade.
By | Tim Worstall 13th December 2010 13:07

Grey marketing is great - if you're the importer...

Distributors toe an ever-shifting line

Opinion Let's face it: those of us who are in the distribution channel (and that means the distribution channel for absolutely anything, not just tech goods) are in a bit of a bind when we start to discuss grey or parallel imports.

For we're absolutely outraged at the idea that anyone might try to bring in cheaper versions from other territories of products that we've spent a fortune marketing: but we're similarly delighted at being able to source goods with which we can screw over Fred down the road.

It doesn't really help us all that much that the law is entirely a mess in this area either. Take the case of Fei Lam just recently. He had a contact at Foxconn (wouldn't we all like one of those?), which actually makes the iPhone for Apple, and using his Chinese language skills was able to purchase the “white iPhone 4” kits that seem to be driving the fanbois wild.


The holy grail: Fei Lam's China White fed fanboi addiction

Cranking them out from his website, he garnered $130,000 in sales before he was monstered by Apple's lawyers. While US law is indeed different from what applies to us here in Europe, it's still not clear what, if any, laws he was breaking. But then trying to fight a legal case against a company the size of Apple is not known to be conducive to wealth creation either.

That sort of parallel or grey importing ought to be entirely legal over here: it's one of the cornerstones of the entire European Union project that there must be free movement of goods. There are a couple of restrictions (medical devices and drugs are still nationally approved in large part) but other than those very specific areas, anything that it is legal to sell in the EU can be sold anywhere in the EU.

But this then comes up hard against the desire (an entirely logical desire) of producers to segment their marketplace.

As any seller of anything at all knows, there are people out there who will happily pay more than others will for the same product. One of the great tricks of marketing is to identify those over-spenders and to extract their extra cash from them.

Staying with the iPhone, this means having a high price on issue day and dropping it a couple of hundred $ forthwith. To the hugely amusing screams of the early adopters: what did you think they were going to do when there were those gasping for the toy and then those who would only buy it if reasonably priced? Or the last Jaguars of the Ford times, which were essentially the T-Bird (for the US) or Mondeo (UK) in a prettier body shape? Or, my favourite, some Starbucks offer to shake the sugar into your iced tea for you. For 50 cents extra of course.

For there are those who don't care about 50 cents if it means having to stir it themselves, while there are those who care very much. The art is getting that 50 cents out of those who don't care while still getting the business of those who do.

In short: it's all about market segmentation, and allowing the extraction of the greatest amount possible for one's product.

Our problem with the law in the distribution channel, is that there's a distinct conflict between these two desires: for free movement of goods and for producers to be able to segment the market. And producers do segment, not just by changing their offerings: they do so by having different price structures in different territories.

Old rag blues

The old-school exemplar was Levi's jeans, which were middle-of-the-road stuff in the US, but marketed in Europe as being near designer quality – with prices to match. Thus the dozen pairs everyone brought back from New York on Freddie Laker's Skytrain, as if we were nipping over the Berlin Wall or something. There are more modern examples as well: there's a low-cost Brazilian version of Windows that turns up on low-end Portuguese PCs for example.

So how has the EU tried to deal with this conundrum? Not all that well unfortunately. For they've continued to insist that there must be free movement within the EU: as the various treaties insist. But to allow some segmentation, they've decided to allow copyright and trademark law to be used as a restriction. This is old but describes the basics. E-Bay was complaining about this here at El Reg.

For cars, as an example, the EU positively encourages parallel imports. Yes, please do go and buy your car in France or Denmark and the local authorities must indeed register it without excessive charges in your home country. Similarly with fags and booze: but then these are classified as personal imports. Larger-scale imports for commercial resale come under a different set of rules (on fags and booze for example, tax of the country of destination must be charged, obviating the point).

Where it's not tax arbitrage being involved, there's still a way in which producers can segment their market. That is to deny the grey importer the use of the necessary trademarks. In one importer's case, the EU ended up saying, in essence: "Of course you can bring in and sell these lovely games-playing computers: you're just not allowed to mention the word “Playstation”, that being a trademark". Of course, “lovely games-playing computer” is not a product description that gets them flying off the shelves.

The law is unclear precisely because it is trying to balance two incompatible desires: to have a single market and yet to allow producers to distinguish themselves in said market. The authorised distributor can't come down like a tonne of bricks on an unauthorised one: for what are they doing wrong? But the unauthorised one has to be very careful indeed in not trampling over any copyrights or trademarks, for the way these are defined, the manufacturer still has control over their use.

In the end though, whatever the legal structure, such grey imports will never be entirely stopped. Here's what Fei Lam was actually shipping to his customers. Over 7,000 people were willing to do that to their shiny new $599 piece of kit? Sheesh.

By the way, anyone know anyone at Foxconn? ®

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