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For years, Huaqiang North Road market in Shenzhen, just across the border from Hong Kong, has been known as the place to go for fake iPhones and cheap handsets in southern China.

An otherwise nondescript complex, Huaqiang North was once the world’s biggest bazaar for made-in-China handsets. Traders there sell phones – usually cheap copies of branded handsets and “improved” models with creative new features such as powerful speakers or flashlights – made by so-called grey-market manufacturers that, combined, produce a significant portion of the world’s mobile phones and have challenged the emerging market share of Nokia and other more established brands.

There will be some 255m grey-market phones made this year, accounting for nearly one-fifth of global mobile shipments and up 11.8 per cent from last year, according to analyst iSuppli. Most of those phones will not stay in either Shenzhen or even China. MediaTek, the biggest supplier of chips to Chinese phonemakers, estimates half of its chips eventually wind up in other markets ranging from south-east Asia to Africa.

Yet the rise of Chinese brands such as TCL, Huawei and ZTE has meant greater competition for many grey-market handset makers, particularly as the market for basic mobile phones within China has become saturated.

Today, many of its stalls are closed and Huaqiang North is no longer the bustling, crowded marketplace it was even a year ago.

That is partly due to a broader decline in the industry. Since the start of the year, nearly a quarter of Chinese grey-market phone manufacturers have left the business, Steven Pan, vice secretary-general for China-based industry group Semiconductor Application Union, told China’s National Business Daily.

Another important factor is a Chinese government crackdown on producers of fake handsets that has intensified over the course of this year. Kevin Wang, an iSuppli analyst, estimates that shipments of grey-market phones will begin to decline from next year, falling to about 150m by 2015.

The crackdown has had a measure of success, in terms of improving conditions for bigger, legitimate Chinese brands, says Sunny Yan, director of investor relations at TCL Communications, a branded Chinese phone maker that in 2004 acquired Alcatel’s mobile phone manufacturing operations.

“In the past we were not willing to go into China,” he says, but since entering the market in 2010 TCL has grown quickly, selling 1.1m handsets in the country in the first half of this year.

David Ku, chief financial officer of MediaTek, says there has been a “structural and qualitative change” in the Chinese phone industry over the past few years as manufacturers have realised the increasing importance of branding and quality.

Some of the more successful grey-market manufacturers have turned to making smartphones. One of the most hotly anticipated Chinese-made handsets comes from a little-known company called Xiaomi, whose eponymous smartphone, which will sell for Rmb1,999 (US$312), has not officially gone on sale yet but has drawn 300,000 pre-orders, according to the company’s website.

MediaTek’s value now “is not in helping people make US$60-US$70 phones, but in how we can help people quickly produce a high-quality handset,” Mr Ku notes.

But there is a growing debate about whether grey-market manufacturers can translate their success to smartphones, and thus whether their slump is the start of a more permanent decline.

Mr Yan believes that “the more they try to make smartphones, the quicker they will die out,” because smartphones require more expensive components. “The research and development requirements for basic mobile phones was not very high. That is not the case with smartphones,” he says.

Their adaptability could prove key for Chinese manufacturers. It was Chinese phone makers that pioneered the concept of putting two sim cards into one device to allow the flexibility of easily switching between networks – a feature Nokia is now belatedly adopting in its phones.

Chinese phone makers “are more flexible and willing to try new ideas and to find new usages,” says Sunny Han, a founder of Taiwanese materials start-up TeamChem.

Pauline Chen, analyst at Credit Suisse, is confident there is still room for grey-market manufacturers to make a comeback. “That is the big question, but the market still has very high expectation that pricing will dominate.”

Copyright The Financial Times Limited 2017. All rights reserved.
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