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Grey handset market surges

Grey handset production grows by 44% in 2009 as 145 million units enter the market

A booming trade in unlicenced handsets is a growing threat to established brands such as Nokia and Siemens.
A booming trade in unlicenced handsets is a growing threat to established brands such as Nokia and Siemens.

The global mobile phone market will have been flooded with 145 million grey devices by the end of 2009, as the market for unlicensed handsets reaches almost 13% of the size of the legitimate sector, according to market research firm iSuppli.

China's grey wireless handset shipments have grown by more than 43% in 2009 and are expected to reach 145 million units by the end of the year, compared with 101 million devices in 2008, and 37 million units in 2005.

The research is likely to make grim reading for major handset brands such as Nokia and Siemens, with worldwide unit shipments of legitimate cell phones expected to decline by 8% in 2009.

The situation looks set to deteriorate further for legitimate handset makers, with the grey market expected to peak in 2012 at 192 million units before leveling off in 2013 when about  176 million units will to be produced.

"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."

While the majority of fake devices being produced are 2G, there is evidence that the fraudsters are moving up the value chain and producing more sophisticated products, according to Wang. "In terms of features, grey-market handsets often are comparable with official phones. Nearly all grey-market phones have 2-megapixel VGA cameras and Bluetooth connections."

Wang added that gray-market firms are even offering smart-phone models for less than $150, featuring Wi-Fi, QVGA-resolution touch-screen interfaces and the Microsoft Windows Mobile operating system.

This level of sophistication is also helping grey producers take an increasing slice of the export market. Indeed, while the fake devices had previously been sold mainly for domestic use in China, the business is now becoming more global, with an increasing proportion of the fake devices being exported.

According to iSuppli, the business underwent a "fundamental shift" in 2008, as domestic shipments began to decline, and exports started to boom. By the end of 2009, exports are expected to exceed domestic shipments by a factor of more than three to one.

"Chinese gray-market handset suppliers have become so successful that they are grabbing share from major international handset OEMs," Wang adds. "Exports of gray-market cell phones 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 grey-market handsets."

Wang added that the surge in exports comes at a time when Chinese consumers are turning away from fake phones because of an absence of after-sales service and the limited life span of the grey devices, which typically only last for about two years.

Grey-market handsets are cell phones that are not recognised or licensed by government regulators. Makers of these products generally avoid paying tax and therefore profit illegally from their operations.

Such phones use fake International Mobile Equipment Identity (IMEI) numbers, which are used by wireless networks to identify valid devices. Grey devices also lack any quality certifications or network entry permits.