By Olga Kharif

Gray is the new black. Just as trafficking in black market goods has eroded sales of consumer electronics, a burgeoning "gray" market for cheap look-alike cell phones now threatens the wireless handset industry.

Just ask the folks at China Unicom and Apple (AAPL). When China Unicom recently began offering Apple's iPhone for as much as $1,172, the company sold a measly 5,000 units its first weekend, according to Reuters. By contrast, when the iPhone 3GS was released in the U.S. earlier this year, it sold more than 1 million units in its first weekend. At full price, the phone flopped.

Part of the reason is that since 2007, the Chinese market has been flooded with iPhones sold in other countries and then modified, or...