China’s mobile ‘grey market’ adopts Android

Google’s Android mobile operating system has found an unlikely source of support in China in spite of the internet search giant’s recent threat to pull out of the country – hundreds of small “grey-market” Chinese phonemakers which are now trying to become legitimate manufacturers of more advanced devices.

Political uncertainty about Google’s status in China has already led to the delay of two high-profile Android phone launches last month, which analysts say could hurt confidence in Android’s development in China.

But in the southern Chinese city of Shenzhen, the hub of Chinese phone manufacturing, a very different business dynamic is driving small phone manufacturers to adopt Android. While Microsoft and Nokia both charge phonemakers for the use of their operating systems, Google provides Android for free.

Android is proving so popular that Mediatek, the Taiwanese chip designer that supplies half of all mobile phone chips used by Chinese manufacturers and has begun work on a Windows Mobile-based smartphone chip, said this week that it was developing a chip that supported Android.

Hsieh Ching-jiang, Mediatek president, said: “Android is quite an attractive solution and a lot of our Chinese clients have requested that we have this capability, so we are working on it.”

Many of China’s small phone manufacturers began as makers of grey market “bandit” devices or cheap knock-offs of popular branded models, but they have grown into a vast market in just a few years.

Grey market manufacturers made 145m phones, or about 13 per cent of the global legitimate handset market, last year, with an increasing proportion exported to other emerging markets, according to iSuppli, the research company. This year, Mediatek expects its handset shipments to increase 20 per cent to 450m.

What is driving the shift to Android, however, is that these handset makers are trying to become legitimate brands that produce more sophisticated, internet-capable phones. Using a mainstream operating system is a key step towards this goal, phone manufacturers say, but cost remains the major consideration.

Echo Liu, sales manager at SOP Electronic, a handset maker in Shenzhen, said “margins in the export business are squeezed to an extent that it’s not sustainable”.

The growing importance of these manufacturers prompted Microsoft to sign a deal at the beginning of this year with Mediatek – which, after Qualcomm, is the world’s second biggest mobile chip supplier – that will make it easier for Chinese phonemakers to use Windows Mobile from a Mediatek chip.

Both Microsoft and Mediatek declined to elaborate on details of the deal, and Microsoft said it had no comment on competitive pressures from Android in China.

Analysts said, however, that the key component of the deal was likely to involve Mediatek paying Microsoft to waive an upfront fee from phonemakers. Individual phonemakers would still need to reach a separate deal with Microsoft on royalty payments.

One Taipei-based analyst said: “Without Mediatek in the picture, there was no way at all that the small phonemakers would sign on with Microsoft, so this at least gives them a chance ... but the long-term trend is definitely a move towards Android”.

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