China's gray-market handset shipments in 2009 are set to grow to 145 million units, or nearly 13% the size of the legitimate global handset business, according to iSuppli. The gray market has become too big and too lucrative for the mobile handset supply chain to ignore anymore.
China's gray market wireless handset shipments are expected to amount to 145 million units in 2009, up 43.6% from 101 million in 2008. This will amount to 12.9% of the 1.13 billion unit global market for legitimate handsets.
The gray market in 2009 is set to nearly quadruple from 37 million units in 2005. In contrast, worldwide unit shipments of legitimate handsets will decline by 8% in 2009.
By 2013, the gray market will grow to 176 million units, expanding at a CAGR of 11.7% from 2008. In contrast, the legitimate handset market will achieve a CAGR of only 4.4% during the same period.
The gray market will peak in 2012 at 192 million units.
Gray-market handsets are handsets manufactured in China that are not recognized or licensed by government regulators. Makers of these products generally do not pay China's value-added taxes and, therefore, profit illegally from their participation in the market, iSuppli said.
Such phones employ fake IMEI numbers, which are used by wireless networks to identify devices. The phones also do not carry test/quality certification or network entry permits.
"Because of its under-the-table status, China's gray market has been difficult to size up," said Kevin Wang, director, China research, for iSuppli. "However, with its vast size, growing competitive presence and increasing influence on the global supply chain, this market now must be reckoned with."
Gray market comes out of the shadows
The gray handset market has long been a fact of life in China, with domestic demand propelling sales growth. However, the business underwent a fundamental shift in 2008, as domestic shipments began to decline, and exports started to boom. In 2009, exports are expected to exceed domestic shipments by a factor of more than three to one, iSuppli said.
These exports are starting to impact the sales of legitimate established global players.
"China-based gray-market handset suppliers have become so successful that they are grabbing share from major international handset OEMs," Wang said. "Exports of gray-market handsets are set to rise to 110 million units in 2009, up from 60 million in 2008. International consumers in both developed and developing economies are being lured away from established brands by the low cost of gray-market handsets."
Ironically, the export explosion comes at a time when consumers in China are turning away from gray-market phones because these products often come up short in terms of after-sales service and quality and as consumers are gravitating toward brand-name products,
Gray-market handsets typically enjoy a lifetime of only two years, due to poor quality control during the manufacturing process, iSuppli said.
Gray phones go upscale
While gray-market handsets are low priced, they are not necessarily low end.
"In terms of features, gray-market handsets are often comparable with official phones," Wang said. "Nearly all gray-market phones have 2-megapixel VGA cameras and Bluetooth connections. Gray-market firms are even offering smartphones for less than US$150, featuring Wi-Fi, QVGA-resolution touchscreen interfaces and Microsoft Windows Mobile."
Component opportunity
With its large size and rapid growth, the gray handset market has become a major revenue driver for suppliers of semiconductors and other components. While MediaTek is one of the primary suppliers of semiconductors to the gray market, many other makers of semiconductors for legitimate handset OEMs also sell to gray-market manufacturers. However, the chips sold into the gray market often do not meet quality specifications of mainstream handsets.
While this represents a lucrative opportunity for these semiconductor suppliers, it does come with some risks.
"As the handset gray market gets bigger, component suppliers may get some pressure from the legitimate OEMs and others in the ecosystem to stop selling into this area," warned Francis Sideco, principal analyst, wireless communications, for iSuppli. "This pressure may come in the form of shrinking design wins and potentially, intellectual property lawsuits."
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