Abstract

Minimizing the Impact of the Underground Economy on the Industry

In initial mobile phone development in China, a number of control measures were implemented. A black mobile phone market developed out of companies who wanted to evade these control measures or avoid paying taxes. The emergence of such an industry sector was also aided by the vast territory of China, adding to the degree of difficulty in controlling the industry.

Black market companies emerged in many regions in China using opportunistic methods. They not only created difficulties in terms of industry management, but also created very significant competitive pressure for companies operating in the regulated industry environment. Although the Chinese authorities repeatedly tried to regulate the black market mobile phone sector, these underground economy activities proved hard to stop with significant economic benefits to be won for companies active in this sector.

The Chinese authorities were criticized because of their lax attitude in regulating the black market. However, if some black market companies would be willing to enter the regulated sector, the impact of the black market on the legitimate companies could be gradually reduced, and would give legitimate Chinese makers more strategic room to operate.

Aiming to Establish a Comprehensively Regulated Competitive Environment

In the past, the Chinese government's attitude towards black market mobile phone companies swung between suppression and pacification. The recent policy of lowering testing fees and expanding testing locations is an expression of its more tolerant attitude.

The strict control over the industry caused black market mobile phone companies to lay low for periods of time, but they would always re-emerge very quickly. With the Chinese government adopting a less harsh approach to the sector, the government hopes that more companies will take the initiative to test their products. This will function as an added control over product quality, and will increase protection for consumers.

By encouraging black market mobile phone vendors to participate in product testing, they can be brought under industry control, which will contribute to the creation of a more regulated competitive environment. By eliminating a situation in which a small number of bad apples are forcing out legitimate companies, makers will operate on the same level playing field. The competitiveness of Chinese mobile phone companies will also improve as a result.

Reduction of Testing Barriers Need to Be Accompanied with Other Measures

For consumers, a good result of current developments would be more high-quality mobile phones and more diverse products on the market. Although a new testing center has been added, human resources and service capabilities are still tight as there is a large amount of testing work to be done.

Furthermore, before a mobile phone product reaches the market, it needs to go through other testing labs besides the China Telecommunication Technology Labs before completing certification. Therefore, although the newly added testing center accelerates part of the testing process, its contribution to the overall process will be more limited.

Also, the fundamental meaning behind the testing is to protect consumer rights. The required fees for testing, though, are high. The testing process could also be called a monopoly, and lacks competition, which might lead to reduced efficiency. A key factor in future development will be whether there will be opportunities to expand testing capabilities, and whether licensing will be used to introduce private companies to this process, lowering fees and increasing service quality by using a competition model.

Although these types of measures are unlikely to be implemented in the short term by the Chinese government, it could become a scenario in the long term future.

Black Market Mobile Phone Companies Will Continue to Thrive with Profits Still High

From the viewpoint of black market mobile phone vendors, sending products for testing costs a considerable amount of time. Furthermore, if they enter the government-regulated arena, many laws and tax regulations will lower the flexibility they have in market operations, with the most direct impact being a decline in profits.

Mobile phone makers, testing mechanisms, sales channels and consumers are all part of the black market mobile phone problem. Therefore, trying to considerably lower the number of black market mobile phones by increasing testing locations and lowering testing fees might not be enough. These actions must be combined with measures aimed at distribution channels and telecom operators in order to achieve more comprehensive results.

If these measures can increase the costs for black market mobile phone makers, they will be more inclined to subject their products to testing and government regulation. Only then will it be possible to considerably diminish the presence of black market mobile phones, and create a fairer competitive market environment.

Appendix

List of Companies