Fake iPhone packaging is displayed on a stall at an outdoor market selling counterfeit Chinese made items in the Golden Triangle, situated along the T Fake iPhone packaging is displayed on a stall at an outdoor market selling counterfeit Chinese made items in the Golden Triangle, situated along the T

The grey market for cellphones will contract for the second consecutive year in 2013, with worldwide shipments dropping by 12% as both makers and buyers of these handsets turn to branded products, according to the China Research Service at information and analytics provider IHS.

Gray-market handsets, as defined by IHS, include counterfeit products like fake iPhones as well as white-box cellphones on which any logo can be readily imprinted. White-box handsets often are illegal despite sporting a logo because they use smuggled chips, lack official certification from China’s Ministry of Industry and Information Technology (MIIT), use fake International Mobile Equipment Identity (IMEI) codes and usually are trafficked through Hong Kong to avoid valued-added taxes from being imposed on the devices.

Shipments of grey devices reached their peak in 2011 with a total of 250.4 million grey-market cellphones. But beginning last year, the market began to shrink, contracting to 221.5 million units. The deceleration will continue this year to 194.6 million units, followed by another steep fall to 173.8 million units in 2014. The decline will continue at least through 2017, when shipments will dwindle to 133.9 million units, as shown in the attached figure.

The grey market overall is impacted by an accelerated decrease in the sales of lower-end handsets known as feature phones. And while the ultra-low cost handset (ULCH) and smartphone segments of the gray market will continue to grow until 2014, expansion in these segments won’t be enough to counteract the drop in the feature phone sector.

“A combination of supply and demand factors is causing demand to decline for grey-market cellphones,” said Kevin Wang, director of China research at IHS. “On the demand side, the consumers in emerging markets who used to be the major purchasers of gray-market cellphones increasingly are preferring brand-name handsets. On the supply side, some gray-market handset makers have become branded manufacturers in order to promote their own names in developing countries.”

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