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Chinese cellphone makers at risk from black-market rivals

Already beset by an industry-wide downturn in the domestic sector, China's mobile-handset vendors also are facing a growing threat from a flourishing black market for cellphones, analysts said.

While some foreign firms such as Nokia and Motorola are partially insulated from the illegal trade, Chinese vendors struggling from increased competition will have to contend with this growing illegal market for the foreseeable future, they said.

"It's a huge market," said Ted Dean of telecom consultancy BDA (China) Ltd.

BDA puts the black market for cellphones to be anywhere from 15 to 20 million units per year. In comparison, mobile-phone subscribers have increased by up to 60 million per year in recent years. The black market includes brand name phones smuggled into China and unlicensed "clone" phones made with cheap components.

The growing market for illegal cellphones has put the pinch on China's domestic industry.

Two major vendors, Amoi Electronics Co (夏新電子) and Konka Group Co (康佳), recently attributed their falling first half revenues in part to the growing trade of black-market cellphones.

Chinese handset vendors saw their combined market share surge to 60 percent in 2003, mainly on the strength of sales of low-end models, according to Beijing research house Analysys International. But foreign vendors fought back last year with new models targeted at the low-end customers and by penetrating second-, third- and fourth-tier cities.

As of May, Chinese mobile phone makers saw their combined domestic market share shrink to 44 percent from April's 48 percent, according to the Xinhua news agency.

"If you look at the results of these [handset] companies over the course of the last six months, many of these companies are in crisis," Dean said.

But the black market has a more limited effect on foreign powerhouses such as Nokia who inspire strong brand loyalty from their customers, he said.

Furthermore, while foreign vendors use sales of low-end phones to gain market share, they earn profits off of their high-end models such as Motorola's Razr, said Chris Han, an analyst with Norson Telecom Consulting.

"But local vendors depend on the low end," he said, adding the biggest threat to these vendors comes from unlicensed clone phones in the low- to mid-end.

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