iPhones making their way back to China

Gray market sales have been a serious problem for Apple (NASDAQ: AAPL) with its hit iPhone and now it's getting weirder: iPhones made in China are being exported to the United States and Europe and then smuggled back to the People's Republic.

Apple's been puzzling over a paradox with the iPhone. The company says it has sold 3.7 million units, but only 2.3 million have been registered on the networks of its U.S. and European wireless partners. It seems that the phones are being smuggled out of their target markets by small-time entrepreneurs and then shipped overseas where they are unlocked and set up with wireless providers that are not part of Apple's distribution deals. iPhones sell for at least $100 more in China than they do here.

The New York Times reports that "For Apple, the booming overseas market for iPhones is both a sign of its marketing prowess and a blow to a business model that could be coming undone, costing the company as much as $1 billion over the next three years, according to some analysts."

Apple's struggle to hash out a wireless network deal in China has stalled the phone's official release there and, for now, the company is giving up a huge amount of revenue while consumers get the iPhone the only way they can. To make it worse, Apple doesn't appear to have any legal recourse.