China's smart phone growth declines in gray market handsets

IHS iSuppli's research shows that China's domestic smart phone market is expected to achieve a record growth in 2011, and shipments are expected to increase by 53% from 55.0 million last year to 54.1 million.

Among them, more than 10 million smart phones will come from ZTE and Huawei. It is expected that overall domestic smart phone shipments in China will continue to grow in the next few years. IHS predicts that in 2015, Chinese manufacturers’ smartphone shipments will reach 111 million, which excludes the Apple iPhone smuggled into China and the HTC mobile phone sold in China. In 2010, these two types of mobile phones were approximately 7 million.

In China's white-chip and grey-market smart phone market, in 2011, Chinese domestic suppliers will mainly focus on EDGE smart phones based on the Android operating system. Since 2012, they have also attached importance to 3G smart phones. It is estimated that the total gray mobile phone shipments in 2011 will increase to 255 million units, and in 2012 it will drop to 213 million units. The gray market handset shipments will continue to decline in the next four years, as shown in the figure.

Although the grey market suppliers are optimistic about the prospects of emerging markets, the lack of new attractive selling points will lead to price competition. This was the case in 2011. Despite the increase in shipments, the revenue of the grey market mobile phone market is expected to decline. Existing companies may also withdraw from the smart phone industry and look for better opportunities in other consumer electronics sectors such as tablet PCs.

Many factors have led to a drop in shipments of smart phones in China’s grey market, including the Chinese government’s tightening of supervision and crackdowns on counterfeit mobile phones. In addition, manufacturers in emerging markets supply mobile phones to their own markets, taking away the share of gray market mobile phone providers.

Other factors include end-users' concerns about the quality and after-sales services of grey-market mobile phones; major Chinese manufacturers such as ZTE, Huawei, TCL/Alcatel, and Sang Fei collaborate with local operators to expand their market share in developing countries; some traditional grey markets Mobile phone suppliers transformed into branded OEMs and promoted their brands in developing countries. Grey marketed mobile phones increased product differentiation efforts. Most gray market mobile phones use similar platforms, such as MediaTek and Spreadtrum’s platforms; and 2G mobile phones. In contrast, the grey market lacks cost advantages, and at the same time there is a lack of competitive 3G complete solutions for gray-market mobile phones.

In the second quarter of this year, IHS found that there were many small independent mobile phone design companies in Shenzhen that had closed due to continued losses. Prior to this, in April and May, mobile phone shipments in the white and gray markets fell sharply. Channel inventory was too high in the first quarter of 2011, while demand in emerging markets declined in the second quarter.

In addition, the Chinese government has cracked down on illegal grey-market mobile phones and Shenzhen's counterfeit mobile phone suppliers, increasing the pressure on Chinese gray-market mobile phone manufacturers.