China’s 145 Million Unit Gray Market

Like many other illicit enterprises, China’s vast gray-market cell phone business is one of those things that many know about but few actually discuss it. iSuppli has reported that with gray-market shipments in 2009 set to grow to 145 million units, or nearly 13 percent of the size of the legitimate global cell phone business, the gray market has become too big and too lucrative for the mobile handset supply chain to ignore anymore.

They report that China’s gray market wireless handset shipments are expected to amount to 145 million units in 2009, up 43.6 percent from 101 million in 2008. This will amount to 12.9 percent of the 1.13 billion unit global market for legitimate cell phones. The gray market this year is set to nearly quadruple from 37 million units in 2005. In contrast, worldwide unit shipments of legitimate cell phones will decline by 8 percent in 2009.

By 2013, the gray market will grow to 176 million units, expanding at a Compound Annual Growth Rate (CAGR) of 11.7 percent from 2008. The legitimate cell phone market will achieve a CAGR of only 4.4 percent during the same period. The gray market will peak in 2012 at 192 million units. This figure presents iSuppli’s forecast of gray-market cell phone shipments.

Gray-market handsets are cell phones 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.Such phones employ fake International Mobile Equipment Identity (IMEI) numbers, which are used by wireless networks to identify valid devices. These phones also do not carry test/quality certifications or network entry permits.

iSuppli says the gray cell phone market long has 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. These exports are starting to impact the sales of legitimate established global players.

With its large size and rapid growth, the gray cell phone 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.

What do you think of the gray market and its affects on the legitimate market???