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 user 2009-11-17 at 10:28:38 am Views: 45
  • #22944

    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.

    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, 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.”