BOOMING GRAY MARKET THREATENS CELL-PHONE INDUSTRY

[Anonymous]

http://www.businessweek.com/technology/content/nov2009/tc20091111_864446.htm
BOOMING GRAY MARKET THREATENS
CELL-PHONE INDUSTRY
The iPhone’s official carrier in China is enduring
meager sales, just one result of the expansion of the global market for
copycat handsets
Gray is the new black. Just as
trafficking in black market goods has eroded sales of consumer
electronics, a burgeoning “gray” market for cheap look-alike cell phones
now threatens the wireless handset industry.Just ask the folks at China
Unicom and Apple (AAPL). When China Unicom recently began offering
Apple’s iPhone for as much as $1,172, the company sold a measly 5,000
units its first weekend, according to Reuters. By contrast, when the
iPhone 3GS was released in the U.S. earlier this year, it sold more than
1 million units in its first weekend. At full price, the phone
flopped.Part of the reason is that since 2007, the Chinese market has
been flooded with iPhones sold in other countries and then modified, or
“unlocked” so they work on other networks, before being sold for as
little as $650. In other cases, Chinese consumers had already purchased
low-priced, repurposed used phones.But much of the blame lies with a
burgeoning gray market for copycat phones, often made to look like the
real thing but sold for a fraction of the price. “Anyone who’d buy an
iPhone from China Unicom is insane,” says Charlie Wolf, senior analyst
at Needham. Fewer than 5% of Chinese can afford China Unicom’s iPhones,
says Neil Mawston, an analyst at consultant Strategy Analytics.

Knockoffs
Make Up 13% of Handsets
Lackluster iPhone sales dealt a blow to
China Unicom, which hoped the iPhone would boost subscriber growth the
way it helped AT&T (T), the exclusive U.S. iPhone provider. It was
also bad news for Apple as it tries to forge ties to wireless carriers
in new countries, beyond the 64 where the iPhone is already sold.The
gray market extends well beyond China, however. In Africa, Eastern
Europe, Latin America, and even the U.S., handset clones are on the
march. Gray market phones may resemble the real thing but don’t carry
warranties, and their makers often don’t pay licensing fees to such
component makers as Qualcomm (QCOM). Gray market phone shipments from
China are up 43.6%, to 145 million units, this year, according to
estimates by consultant iSuppli. They now constitute 13% of the global
legal handset supply. In contrast, worldwide unit shipments of
legitimate cell phones will decline 8% this year.Many knockoffs are made
in small factories across Asia. “You have all these little workshops,
and they do some extremely creative things” to adapt phones to local
markets, says Frank Meehan, CEO of cell phone maker INQ, which supplies
carriers such as Hutchison Whampoa. “There are hundreds of them [in
China], and they are springing up in India.”In the coming years, some
smaller workshops could morph into larger enterprises turning out
legitimate goods and competing with Nokia (NOK), Apple, and Samsung.
“What’s going to happen is, as these players develop the expertise, some
of these players will start to enter the legal market,” says Jagdish
Rebello, senior director at iSuppli. “Legal handset manufacturers are
extremely concerned.”

Pickup in Sales of Used Phones
Some gray
market handsets carry names similar to the mainstream brands but often
don’t work as well. “We discourage the use of phones acquired through
unknown channels for a very simple reason: doing so may ultimately
saddle the consumer with an incomplete experience and raise the
possibility that what they are buying through gray markets is not a
genuine Motorola product,” Motorola (MOT) said in a statement. Apple and
China Unicom didn’t respond to requests for comment.In another trend
that may erode revenue for handset manufacturers, sales of used phones
have picked up as well. At CellularCountry.com, sales are up 3% to 5%
this year, says CEO Doug Morgen. In fact, the Huntington Beach (Calif.)
site, which currently sells 10,000 phones a month, is looking to open
physical stores in California and Europe in the next six to 12 months.
“Business is good,” Morgen says. “People are starting to buy more used;
they need to cut their bills.”To combat all these players, handset
manufacturers have long tried suing gray market phone makers and various
distributors. Others are starting to pressure component suppliers, such
as MediaTek, believed by analysts to supply gray market phone makers.
MediaTek did not return a request for comment.But mainstream
manufacturers and carriers may need to adapt their strategies to this
changing marketplace instead and strive for agility, lower prices, and
product innovation. “It’s very hard to fight it in courts,” INQ’s Meehan
says. “They just need to get leaner and meaner. Look, it’s just
competition at the end of the day.”

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November 17, 2009 at 10:28 AM