Business in China's Mobile Phone Gray Market Slowing: iSuppli

China's gray-market cell phone shipments are slowing, iSuppli reported Dec. 16. While still set to ship a considerable 255 million units in 2011-up from 228 million in 2010-it's a considerably slower pace than the 43.6 percent growth between 2009 and 2010.

"The object of a nationwide government crackdown, the gray cell phone market in the world's most populous country is facing some trepidation as official scrutiny focused on illegal handsets and as consumers are starting to lose some interest in the devices," Kevin Wang, director of China research at iSuppli, said in a statement. "This created particular challenges for white-box handsets-on which gray-market dealers can put their logos." 

Gray-market phones use smuggled chips, have fake international mobile equipment identity codes, have no certification from China's Ministry of Industry and Information Technology, and are smuggled to Hong Kong to avoid being taxed, Wang added.

The expected slowed-down pace of this still significant market is the result, says iSuppli, of gray market suppliers being unable to cut prices any further, even as they hope to gain new customers in developing markets.

"Suppliers also will find themselves competing with an increasing number of locally branded original equipment manufacturers (OEMs) that provide better quality and after-sales service," iSuppli said in the report.

In addition to China, gray-market handsets have large audiences around Asia, including in Thailand, Vietnam, Indonesia and the Philippines, and China's neighbor Pakistan. While 2010's gray-market phone shipments within China are expected to total 24.2 million units, down from 33.2 million in 2009, shipments to other Asian countries are now forecast to reach 154.4 million units, up from 110.2 million.

In the more up-and-up arena of China's white-box vendors, shipments are expected to grow by 36.4 percent in 2010 and continue climbing through the next five years. Not only will Chinese OEMs improve their global sales, said Suppli, but its handset makers will win more orders from international carriers.

"Within the domestic market, China's 3G handsets are poised for dramatic expansion-reaching 51 million units in 2010 and maintaining growth in the next five years," states the report, "thanks to the continued decline of both 3G handset prices and service fees."

By 2014, shipments of local 3G handsets are expected to reach 134 million units.

U.S. phone makers are also finding an audience in Chinese consumers. Dell first entered the smartphone market by offering its Mini 3 through China Mobile (as well as with Brazil's Telfonica), and the Apple iPhone 4 received an enthusiastic greeting when it arrived in September-though pricing prevented sales from being what China Unicom hoped for.
 
In a Dec. 2 research note, according to Fortune, analyst Travis McCourt with Morgan Keegan told investors that the firm suspects "iPhone sales will begin to rapidly improve as China Unicom has lowered its pricing, Apple has added WiFi (which was lacking until late summer), and the iPhone 4 has launched (in late September)."

He added that Android phones represented 50 percent of the smartphones sold during the last quarter-up from zero a year ago - and that the Chinese smartphone market grew 200 percent year over year, as the broader cell phone market grew by 220 percent.

"In general, smartphones have exploded in China this year," wrote McCourt.