Abstract

Direct Sales to Operators Threaten Black Market Phone Industry

In the second quarter of 2006, Chinese mobile operators, like China Mobile and China Unicom, purchased 21 million phones, 17.8% of the total number of market sales, up significantly from 7% in 2005. The phones were purchased from both international brands and Chinese vendors, including Nokia, Motorola, Samsung, Sony Ericsson, NEC, Lenovo, Bird, and Amoi.

In China's first and second tier cities, 3C chains and telecommunications chains account for over 50% of mobile phone sales. In third, fourth, fifth, and sixth tier cities, independent retail stores and mobile operators' outlets account for over 50% of sales.

China's primary black market mobile phone market is found in third and fourth tier cities and rural areas, and this is where the industry's distribution system can work to its best advantage. Therefore direct purchasing by mobile operators will not have a significant effect on black market mobile phone manufacturers, which are not particularly influential in first and second tier cities.

In third and fourth tier cities, and even fifth and sixth tier cities and rural areas, mobile operators' outlets still have a definite influence. Large-scale direct purchases by mobile operators indicate that  top domestic brands in China will be able to expand their range and increase sales in third tier and smaller cities, where they will fiercely battle black market mobile phones.

The rise of black market mobile phones has caused problems for Chinese mobile phone vendors, and Bird, TCL, Amoi, and Konka have all lost money. In late 2006, Lenovo, Haier, Amoi, Bird, and TCL formed a strategic alliance with Suning Appliance chain, promising to provide one million phones at discounts up to 50% off the original price in an attempt to reduce the price gap with black market mobile phones, and stimulate sales.

Direct sales to mobile operators are another marketing channel that can help revive sluggish sales by domestic phone vendors. China Mobile and China Unicom are increasingly purchasing phones from Chinese vendors, and it is clear that the Chinese government is using these operators to indirectly support Chinese vendors. These vendors are also focusing more on winning orders from and increasing sales to operators and actively meeting the operators' demands.

Advent of 3G Era Will Weaken Black Market Phone Industry

The rise of black market mobile phone industry can be attributed to a number of factors: the delay in 3G services, the mobile phone licensing system, the appearance of total solutions for mobile communications, IDHs, unused production capacity, distribution reforms, income discrepancies. If one or two of these were lacking, the black market mobile phone industry would not be what it is today.

The primary reason that the black market mobile phone industry has been able to spread through China and threaten China's domestic vendors is the delay in 3G service.

TD-SCDMA is still not mature, and this has delayed implementation of 3G service in China. In order to increase China's visibility and clout in the telecom sector, the Chinese government has spared no pains to promote TD-SCDMA, one of five 3G standards, in the hope that providing a market for the technology will help it develop.

But TD-SCDMA technology and industry are still not mature. China's TD-SCDMA is still in its outdoor testing phase and it is not known when the system will be ready for commercial use.

2G GSM/GPRS/EDGE (Enhanced Data rates for GSM Evolution) technology have well-developed value chains and mature technology, greatly decreasing the industry threshold. With the help of chipset total solutions and IDHs, the black market mobile phone industry has been able to release a continuous stream of 2G products across China.

While 2G service is focused on voice communication, 3G service offers greatly expanded data services as well. As data services expand rapidly with the arrival of the 3G era, customized phones will become more common and the market share of mobile operators' customized phones will increase significantly. In addition, operators may offer considerable subsidies to help consumers make smooth transitions to 3G.

The current structure of China's mobile communications market is mainly voice service, prepaid subscribers, and an open market model; in the 3G era the trends will be toward data services, monthly payments, and operator channels.

Even if black market mobile phone manufacturers, which mainly use highly integrated software and hardware and highly limited chipset total solutions, acquire licenses and become legitimate vendors, they will have little chance of winning orders from mobile operators as they do not have the flexibility necessary to produce customized products.

In addition, IDHs and chipset total solution manufacturers lack 3G development capabilities and chip solutions, so when the 3G era arrives black market mobile phone manufacturers will loose their technology sources, and will see their influence in China's market fade.

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