Cell phone industry’s dirty little secret: China’s 145 million unit gray market

EL SEGUNDO, USA: Like many other illicit enterprises, China’s vast gray-market cell phone business is one of those things that everyone knows about -- but few want to discuss.

However, 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.

In a market-research first, iSuppli Corp. has managed to lift the veil on China’s secretive gray handset market and develop an estimate of market size.

China’s gray market wireless handset shipments are expected to amount to 145 million units in 2009, up a stunning 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. In contrast, 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.

The figure presents iSuppli’s forecast of gray-market cell phone shipments.Source: iSuppli, Nov. 2009

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.

“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. That’s why iSuppli has leveraged its extensive research capabilities to provide an estimate and forecast of shipments, the first time this has been done by a market research firm.”

Gray market comes out of the shadows
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.

“Chinese gray-market handset suppliers have become so successful that they are grabbing share from major international handset OEMs,” Wang said.

“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 gray-market handsets.”

Ironically, the export explosion comes at a time when Chinese consumers 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.

Gray phones go upscale
While gray-market cell phones are low priced, they aren’t necessarily low end.

“In terms of features, gray-market handsets often are 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 smart-phone models for less than $150, featuring Wi-Fi, QVGA-resolution touch-screen interfaces and the Microsoft Corp. Windows Mobile operating system.”

Component opportunity
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 supplier 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 gray-market handset 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.”

Latest LiMo platform release heralded by iconic handset from Samsung and Vodafone

LONDON, UK & TOKYO, JAPAN: LiMo Foundation™, a global consortium of mobile industry leaders today announced the launch of the first LiMo Release 2 (R2) handset that supports the brand new Vodafone 360 service on a ground breaking Samsung device. This news coincides with the further announcement from LiMo today within which all operator members on the LiMo Board have reaffirmed their intent to bring LiMo R2 devices and associated services to market during 2009/2010.

The Vodafone 360 H1 by Samsung, which boasts one of the market’s sleekest and most sophisticated touchscreen user interfaces (UI), provides end users with a state-of-the-art user experience to extend and enrich their service experience through Vodafone 360. This highly evolved coupling of an advanced device with next generation operator services epitomizes the distinct capabilities of the LiMo Platform and the uniquely collaborative nature of the LiMo ecosystem. Further highly innovative and differentiated R2 devices from LiMo members will flow into all regions through 2009 and 2010.

“The collaboration between Vodafone and Samsung that resulted in the 360 H1 device is a ringing endorsement of LiMo’s uniquely independent and collaborative approach to realising key technology for the benefit of the whole industry and signals the first of a wave of R2 LiMo handsets due in the coming months,” said Morgan Gillis, Executive Director of LiMo Foundation. “The Vodafone 360 H1 by Samsung delivers an inspiring service and handset combination which illustrates the game-changing results that eventuate when a handset platform enables leading operators and vendors to realise their vision of new user experiences with full freedom.”

“As a Founder Member of the LiMo Foundation, we have been highly involved in driving the Platform forward and are truly delighted that Samsung has delivered the first R2 LiMo handset”, said JK Shin, Executive Vice President and Head of Mobile Communications division, Samsung Electronics. “Vodafone 360 H1 by Samsung is our commitment to deliver the quality and richness of the LiMo Platform to consumers worldwide. Together with Samsung'’s proven technology leadership in the mobile phone industry, I strongly believe that Samsung will provide better value to our consumers along with Vodafone’s ground breaking service, Vodafone 360.”

As Samsung’'s first LiMo based product, the Vodafone 360 H1 offers a superior mobile experience to end-users through the Vodafone 360 service. The Vodafone 360 H1 by Samsung comes with an ultra brilliant 3.5” WVGA AMOLED display and a wide range of advanced features including 720P HD video recording as well as exclusive Vodafone services. Equipped with high performance in a stylish design, the phone provides a superb user interface and seamless connectivity.

The Vodafone 360 service includes a universal contact list that integrates information from address books within various services, and a 3D zoom feature that enables users to browse through their latest interaction in chronological order.

“Vodafone is privileged and honoured to be the first operator to launch a LiMo handset based on the R2 LiMo Platform. We believe this groundbreaking smartphone and platform combination will completely revolutionize the way in which end-users access their favourite services on their mobile phone,” said Patrick Chomet, Vodafone Group Director of Terminals and a founder director of the LiMo Foundation, “We have chosen to launch our new service strategy on the LiMo Platform, which demonstrates Vodafone’'s strong belief and ongoing commitment to LiMo.”

Android key to defining mobile experience from operators

BOSTON, USA: Due to the rise of mobile internet and its associated revenue opportunities, cell phone carriers are trying to wrestle control of the user experience away from device manufacturers.

Operators are focusing on open operating systems, such as Google’s Android, which allow them greater design input, and create additional revenue opportunities from application downloads.

The next big advance in mobile user experience will come from digital home convergence. These findings were based on interviews conducted with cell phone operators in the US and Western Europe. Details may be found in the Strategy Analytics Wireless Media Labs report, “Mobile Operators Aiming for Control and Convergence of the User Experience.”

“Cell phone carriers still face many barriers to delivery of an optimal user experience,” commented Chris Schreiner, Senior Analyst at Strategy Analytics. “Organizational structures that do not foster communication between different product and service groups are a major obstacle to developing a holistic experience.”

Kevin Nolan, Vice President in the Strategy Analytics User Experience Practice, added, "Operators that offer so-called ‘Triple Play’ packages combining broadband, TV and cell phones, have an immediate head start on the ability to make the next leap in mobile user experience into the digital home.”

More feature phones among new handsets sales in Q2 2009

PORT WASHINGTON, USA: According to The NPD Group, a leading market research company, when it comes to sales of mobile phones in the US feature phones still rule the market, even as smartphone sales continue to increase their share of overall handset sales.

NPD’s Mobile Phone Track information reveals that unit-sales of new feature phones fell 5 percentage points to 72 percent of new handset sales in the second quarter (Q2), while sales of new smartphones (i.e., handsets that are sold with their own operating systems) reached 28 percent of overall consumer purchases -– a 47 percent increase in the category’s share since last year.

“Despite their ties to pricey data plans, the rich Internet access capabilities of smartphones are attracting consumers wooed by lower device prices,” said Ross Rubin, director of industry analysis at The NPD Group.

Overall handset sales volume in the US grew 14 percent year over year in Q2 2009, as sales revenue increased 18 percent. The average selling price of all mobile phones increased 4 percent year over year – reaching $87 in Q2.

NPD’s Q2 2009 ranking of handsets showed the LG enV2 and Samsung Rant led feature phone sales, while Apple iPhone 3G and RIM Blackberry Curve were the top-selling smartphones.

Wi-Fi capability increased three-fold since last year, with 20 percent of all new handsets equipped with this capability. Touch screens on both feature phones and smartphones have also seen tremendous growth since last year, with 26 percent of all new handsets purchased in Q2 including this feature; physical QWERTY keyboards, by comparison, were available in 35 percent of handsets sold.

"Feature phones are taking on more of the physical characteristics of smartphones, and often offer greater exposure to carrier services," Rubin said. "Although their user interfaces continue to improve, the depth of their applications generally lags behind those of smartphones.

"With the price gap between smartphones and feature phones narrowing, to remain competitive feature phones need to develop a better Web experience, drive utility via widgets, and sidestep the applications arms race."

Mobile handset inventories bulk up

NEW YORK, USA: The handset vendors are still telling us it is a frosty market out there but there is a spring in their step as 2Q-2009 results start to pour in.

“269 million handsets were shipped in 2Q-2009,” says Jake Saunders, VP for Forecasting at ABI Research. “That bodes well for 2H-2009. Shipments should build sequentially in a constructive manner with 4Q-2009 potentially returning the industry to better sales form.”

North America may be struggling to shrug off its economic woes, but Asian economies have been lifted by regional stimulus packages and by an anticipation of improved retail sales conditions in the latter part of 2H-2009. ABI Research is revising downwards its forecast 2009 contraction to -7.5 percent from -8.1 percent (1.11 billion).

Samsung (19.4 percent) and LG (11.1 percent) did particularly well. LG notched up a 2.2 percent increase in percentage points, Samsung, 1.45 percent. Nokia staged a remarkable swing in fortunes to achieve a 1.67 percent percentage point increase to 38.3 percent. Nokia is doing all it can to get a number of smartphone models into the market.

It will be interesting to see how Nokia’s market share holds up in 2H-2009, as Samsung and LG have carried out major refreshes to their smartphone product lineups. Sony-Ericsson experienced a 0.56% percent point reduction in its market-share while Motorola and RIM also saw contractions.

“It is well documented that smartphones are proving to be one of the main engines of growth, but they are not just benefiting the Tier 1 players”, says practice director Kevin Burden.

“A number of Tier 3 vendors are also making headway in a competitive market, including Apple and HTC but also vendors such as Huawei and ZTE. While a consolidation is widely expected in the industry, it will not be happening in 2009.”

The pressures for consolidation may not necessarily come from tightening shipment volumes but also from greater integration of hardware, OS and applications development. ASPs for smartphones are higher than the overall average, and have supported R&D to date; but in such a competitive environment, the R&D pricetag can only go up.

China’s mobile handset market expands by 9 percent in Q1

EL SEGUNDO, USA: Driven by government stimulus programs and purchases for the Lunar New Year holiday, China’s domestic mobile-handset shipments in the first quarter of 2009, up 9 percent from 53 million units in the fourth quarter of 2008, paving the way for growth for the entire year, according to iSuppli Corp.

Sales of brand-name GSM-based mobile handsets amounted to 44 million units in the first quarter of 2009, compared to 42 million in the first quarter of 2008. Branded CDMA-based wireless phone sales reached 5.8 million units in the first quarter, up 200 percent from the same period in 2008. Domestic white-box handset sales amounted to about 8 million units during the same period, compared to 10 million in the first quarter of 2008.

iSuppli forecasts that China’s domestic handset market will amount to 238.9 million units in 2009, up 7.8 percent from 2008.

The figure presents iSuppli’s forecast of China’s domestic mobile handset market, based on unit shipments.

iSuppli: Forecast of China’s Domestic Handset Market Unit Shipments, 2009-2013 (Millions of Units)Source: iSuppli, June 2009

“The first quarter is typically strong for China’s mobile-phone market due to purchases made for the Lunar New Year Holiday in January,” said Kevin Wang, director, China research, for iSuppli.

“At the same time, shipments were further boosted by demand generated from China’s stimulus programs that encourage the purchasing of electronic products. Ongoing reductions in voice-service fees and declines in average handset selling prices will assure stable growth in China’s mobile subscribers during the next five years.”

The net addition of mobile subscribers for the nation’s three wireless operators—China Mobile, China Telecom and China Unicom—amounted to 20 million, 5 million and 4 million, respectively, during the first quarter.

Tianyu takes third rank in Q1
Local brand Tianyu in the first quarter surpassed Motorola to become the third largest mobile handset supplier in domestic sales. Nokia and Samsung remain the leaders in the domestic market, with market shares of 34 percent and 21 percent, respectively. Meanwhile, Motorola and Sony Ericsson have continued to lose market share during the past four quarters, while

local-brand OEMs such as Goinee and OPPO have continuously gained market share.
In terms of total handset shipments, ZTE in the first quarter became the largest Chinese handset OEM, with 7.2 million units shipped. Rival Huawei shipped 6.6 million handset units, putting it in the No.-2 position in the market.

Huawei, however, is the largest data card supplier in the world, and its data card shipments reached 5.1 million units in the first quarter this year. iSuppli believes that ZTE and Huawei will continue to grab market share from the international top five, especially in the developing countries.

Mobile phones get smart
With the introduction of 3G services in the country by China Mobile, China Telecom and China Unicom, 3G service brands dubbed G3, e-surfing and WO are being promoted by the Chinese telecom operators. At present, data cards and netbooks are the main products offered by operators for 3G service users, but iSuppli expects growth in the domestic 3G handset market to accelerate in 2010.

With smart phones lining up to become the hottest mobile handset products during the next two years, operators also hope to leverage smart phones to promote 3G services in China.

For its part, China Mobile has cooperated with local handset makers to develop an Android-based TD-SCDMA smart phone named OPhone. In a parallel move, China Unicom has joined the Open Handset Alliance (OHA), while most leading Chinese handset makers are developing smart phones based on the Windows Mobile or Android operating systems.

Digital mobile TV is one of the most popular features for mobile handsets. China Mobile and the State Administration of Radio, Film and Television (SARFT) will jointly promote TD-SCDMA terminals using the China Mobile Multimedia Broadcasting (CMMB) function in China. Beyond CMMB, Wi-Fi, GPS and NFC will become new popular features in China.

Avago announces new CDMA Cell-Band and PCS front end modules for mobile handsets

SAN JOSE, USA: Avago Technologies, a leading supplier of interface components for communications, industrial and consumer applications, today announced two new front end modules (FEMs) that incorporate a power amplifier (PA), duplexer, band-pass filter and coupler to improve efficiency and extend talk time in mobile handsets.

Avago’s AFEM-775x series includes Avago’s CoolPAM and Film Bulk Acoustic Resonator (FBAR) technologies to improve performance in CDMA cell band and dual-band handsets, wireless PDAs and wireless data cards.

The AFEM-775x series are fully matched CDMA FEMs, which are designed to minimize power consumption with three power modes (high power, mid-power and bypass modes). Additionally, the CoolPAM-V technology incorporated in these modules does not require a DC-DC converter which helps save cost and space in handset designs.

Moreover, the power amplifier is manufactured based on advanced hetero-junction bipolar transistor (InGaP HBT) technology which offers state-of-the-art reliability and ruggedness.

Avago’s AFEM-7758 is an FBAR-based duplexer that provides low insertion and outstanding isolation to minimize Tx leakage in both Rx and Tx bands over a wide temperature range. It also improves handset receiver sensitivity and single tone desensitization performance. Moreover, the optimized matching between the PA and duplexer eliminates the need for a bulky and costly isolator.

Mobile handset market stays afloat with 258 million shipped in 1Q-2009: ABI Research

NEW YORK, USA: Despite tough corporate and unemployment news making the headlines, the mobile handset-buying public did not head to the hills during the first quarter of 2009.

Handset vendors had shipped 258 million handsets by the end of the quarter. Although that represents an 11% year-over-year decline, the result significantly exceeded the previous forecast of 253.5 million. “Green shoots are sprouting,” is how ABI Research vice president Jake Saunders describes the latest figures.

Distributors reduced their inventories in 4Q-2008 and 1Q-2009 as they prepared for economic Armageddon but the market did not take another “leg down” in 1Q-2009. ABI Research has introduced a note of mild optimism in its handset forecasts for YE-2009, revising them from -8.4 percent to -8 percent. Saunders notes, “This will not be a V-shaped recovery. 2Q-2008 was a fairly strong quarter for handset sales so handset shipments for 2Q-2009 are going to report a -10 percent decline YoY, but QoQ, they should show improvement.”

“As always there are winners and losers,” comments practice director Kevin Burden. “Samsung and LG demonstrated healthy gains to take their market shares to 17.8 percent and 8.8 percent, respectively. Another star performer was RIM which raised its share to 3 percent due largely to the success of its Blackberry Bold.

It is a little curious that Apple’s market share is just 1.5 percent given the success of its AppStore. As popular as the iPhone3G has been, increased competition in the touch-screen segment and a lack of product differentiation may be dampening demand. ABI Research expects that by 2H-2009 the iPhone3G will have one or more siblings. That will allow Apple to accelerate growth.

Nokia was beaten out by SonyEricsson for the dubious distinction of showing the largest contractions (their shares now stand at 36.2 percent and 5.6 percent). Nokia will breathe a sigh of relief once its latest smartphone, the N97, enters the market. Nokia has had a fair amount of success with the E71 but needs to beef up its touch-screen product lines.

While Sony-Ericsson has the Experia smartphone line-up, the firm’s exposure to the feature phone segment was squeezed more than other handset sectors. While feature phones serve many needs in the market, operators have been especially keen to snap up smartphone stock and were cooler on the ultra-low cost and feature phone orders.

Despite the positive signs, says ABI Research, the industry should be cautious. The IMF has issued another sharp downgrade to its global outlook. Unemployment figures are also likely to continue creeping up. Buyers in the developed world are still concerned about debt and job security. Developing economies are expected to take a hit on the credit side which could have knock-on consequences on credit lines for purchases and stock levels.

Rules change in mobile handset outsourcing business: iSuppli

EL SEGUNDO, USA: With the structure of the mobile handset supply chain upended by the global economic crisis, the old rules for the contract manufacturing of wireless devices have been overturned, leaving new pitfalls for OEMs and EMS providers, according to iSuppli Corp.

One major rule change is that the contract manufacturing business can no longer count on incremental growth in outsourced production from all wireless OEMs.

"Until recently, the contract manufacturing industry yielded consistent double-digit year-over-year growth rates in mobile handset outsourcing,” said Jeffrey Wu, senior analyst, EMS/ODM for iSuppli. “However, the uncertainty in the marketplace now is forcing some OEMs to not only decelerate outsourcing but also to reclaim production by moving it in-house. Nokia, for instance, is one such OEM."

In 2008, Nokia decreased the percentage of its outsourced manufacturing volume to 17.1 percent, down from 21.5 percent in 2007. The attached figure presents the balance of in-house and outsourced manufacturing at Nokia from 2005 to 2008.

“This reflects a larger trend in the mobile-handset supply chain,” Wu said. “Decelerating and decreasing outsourced manufacturing by those OEMs that are still operationally competent will hurt the growth prospects of contract manufacturers.”

Thus, as EMS and ODM providers mull their future strategies, they should not fall into the trap of assuming continued strong growth in production outsourcing among mobile-handset OEMs.

Vertical structure goes flat
Looking at another potential pitfall, the success of Foxconn International Holdings (FIH) in recent years has spurred other EMS firms to emulate the company’s vertical supply chain structure, including component procurement.

FIH’s extensive integration of various nodes of the supply chain into its operations often was credited as a key contributor to the company’s success and its rise to the leading position in the global EMS market. However, the halo surrounding FIH disappeared in 2008 and was replaced by a series of disappointing financial announcements.

"When the economy is going strong and market demand is vibrant, the vertically integrated model can help an EMS provider grow because the economies of scale can be leveraged internally, and the manufacturing business and the component business can subsidize each other," Wu said. "But when the order volume drops, this model doesn’t allow a lot of flexibility for the manufacturing arm and prevents it from sourcing to external component suppliers easily. Thus, the vertical integration model is like a double-edged sword, helping an EMS provider to compete better when the market grows, but making it suffer more when the economy stagnates."

Because of this, EMS firms may want to avoid the hazard of adopting FIH’s vertical structure amid the market downturn.