The fast-growing market for mobile devices made in China’s so-called ‘grey market’ is beginning to impact the sales of legitimate handset vendors, according to a new study by iSuppli. In one of the first attempts to size the market, the research firm said that grey-market shipments in 2009 are set to grow to 145 million units, or nearly 13 percent of the size of the legitimate mobile devices business. The study found that the grey market this year is set to nearly quadruple from 37 million units in 2005 and is up 43.6 percent from last year. In contrast, worldwide unit shipments of legitimate devices is expected to decline by 8 percent in 2009. “Chinese grey-market handset suppliers have become so successful that they are grabbing share from major international handset OEMs,” said Kevin Wang, director, China Research, for iSuppli. “Exports of grey-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.” The firm estimates that the grey market for mobile devices will peak in 2012 at 192 million units.

iSuppli defines this market as handsets that are manufactured in China that are not recognised 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 also employ fake International Mobile Equipment Identity (IMEI) numbers, which are used by mobile networks to identify valid devices. However, Wang notes that grey market handsets are not necessarily low-end devices: “Nearly all grey-market phones have 2-megapixel VGA cameras and Bluetooth connections. Grey-market firms are even offering smartphone models for less than US$150, featuring Wi-Fi, QVGA-resolution touchscreen interfaces and the… Windows Mobile operating system.” The study also notes that the grey 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 grey market, many other makers of semiconductors for legitimate handset OEMs also sell to grey-market manufacturers, the study says. “As the grey-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.