SAN FRANCISCO—Recent developments suggest that the Chinese government has begun to take seriously the country's long-festering problem of smuggled and counterfeit cell phone handsets, according to an analyst.
A June crackdown in China caused shipments of gray-market cell phones to decline that month, negatively impacting some domestic suppliers but boosting major global OEMs, according to Kevin Wang, director of China research at iSuppli Corp. Wang said iSuppli believes the cell phone gray market will be greatly affected by the Chinese government investigation.
Total shipments of gray-market cell phones manufactured in China fell by 25 percent in June compared to May, according to some estimates. Gray-market handsets are those not recognized or licensed by government regulators.
ISuppli (El Segundo, Calif.) predicts gray-market cell phone unit shipments will amount to 172 million in 2010, up 18.6 percent from 145 million in 2009. This would represent a significant decline in growth from the 43.6 percent growth estimated between 2008 and 2009, according to the firm.
According to iSuppli, gray-market phones not only employ fake International Mobile Equipment Identity (IMEI) numbers—used by wireless networks to identify valid devices—but also do not carry test/quality certifications or network entry permits. The makers of these products profit illegally by generally not paying value-added taxes to the government, iSuppli said.
In June, Hualong Trade Co. Ltd., a Chinese handset EMS company located in the city of Suzhou in eastern China, was investigated by Chinese customs officials for suspicion of smuggling and manufacturing counterfeit handsets. The initial investigation was followed by more inquiries from the Chinese Tax Bureau and Administrative Bureau of Industry and Commerce into Hualong’s clients, including independent design houses for handsets and gray-market cell phone manufacturers, according to iSuppli.
Several independent design houses firms in Shanghai now are under investigation for allegedly being employed by Hualong to build primary boards and assembly products, iSuppli said. The investigations also have snared a number of firms which turned out to be investors in Hualong, as well as several gray-market cell phone suppliers with supposed ties to Hualong, iSuppli said. Meanwhile, in the North Huaqiang area of the city, regulators have started looking into the distribution centers of so-called Shanzhai phones—i.e., Chinese imitation and pirated handsets, iSuppli said.
Though local governments have tried for years to defeat the sale and manufacturing of counterfeit cell phone and smuggling, a large investigation by the Chinese central government caught many by surprise, iSuppli said. Because thousands of handset system integrators purchase handset solutions from Chinese design houses and sell the products in China and around the world, it is possible that the effects of the investigation could be felt globally, iSuppli said.