China's booming handset market is a sprawling gray area where branded phones are often sold through less-than-legitimate channels and where counterfeits pop up overnight. And according to industry data, it's getting harder to tell a black- or gray-market phone from an outright fake.

But the rapid evolution of China's iPhone clones has provided a window into how its black market is structured--and how the counterfeit market can turn out knockoffs with such seeming ease. The problem appears partly rooted in the rising availability of chip solutions purposefully designed, with honorable intentions, to lower the barriers to entry for handset developers.

An executive at NXP Semiconductors voiced that conclusion after his company's chips showed up in a Chinese iPhone clone. "System solution providers such as NXP are constantly striving to reduce our customers' engineering effort on electronics and software development for mobile handsets so that our legitimate customers can go into production quickly," said Gerard Cronin, sales and market vice president for NXP's mobile and personal business unit.

But legitimate customers are not the only ones with access to the chips. "Phones can be created without semiconductor companies' even being aware of the existence of the [illegal-]handset manufacturer until the day they start buying from a distributor," Cronin said.

Everyone agrees China's cell phone market is rapidly growing, but there is little consensus on just how large it has become.

BDA, which tracks Asia's telecom markets, predicts the Chinese handset sector will grow to 255 million units in 2011 from 137.9 million units in 2006. Analysts at iSuppli foresee more modest 2011 sales, of 158 million units, up from 120 million handsets this year. According to Gartner's July 2007 report, the Chinese handset market in 2007 is expected to reach 170 million units, with a 30 percent compound annual growth rate (CAGR) from 2003 to 2007. Gartner predicts a CAGR of 18.8 percent from 2007 to 2011.

The estimates vary as widely as the definition of the black market in China. Indeed, some market watchers don't count the black-market numbers at all.

BDA clearly states that its data includes black-market handsets. But the firm does not account for secondhand acquisitions or stolen good in its tallies.

China's black market is a broad spectrum that includes multiple shades of gray. One component is the smuggling of brand-name handsets from Hong Kong and other developed markets that are then sold through illegitimate channels. Then there are what BDA calls "minor branded" phones, sold without legitimate network certificates. A third category comprises refurbished and counterfeit phones, usually based on electronics taken elsewhere and fitted with a new exterior.

At iSuppli, analyst Tina Teng calls the refurbished/counter- feit phone category the "gray market," where "consumers can buy pc boards and cases on the street and then assemble the phones themselves."

Accounting for the various shades of gray, BDA estimates the illegitimate-handset market in China at 20 million units, or roughly 15 percent of the handsets sold in the country in 2006. At iSuppli, the estimates are higher: Teng puts the 2007 gray market at 60 million units.

By: DocMemory
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