EL SEGUNDO, CA -- China’s gray-market cellphone shipments this year are set to grow to 145 million units, or nearly 13% of the size of the legitimate global cellphone business.

Shipments are expected to rise 43.6% from 101 million in 2008, iSuppli Corp. says. This will amount to 12.9% of the 1.13 billion unit global market for legitimate cellphones. The gray market this year is set to nearly quadruple from 37 million units in 2005.

In contrast, worldwide unit shipments of legitimate cell phones will decline 8% in 2009.

By 2013, the gray market will grow to 176 million units, a CAGR of 11.7% from 2008. In contrast, the legitimate cellphone market will achieve a CAGR of 4.4% during the same period. The gray market will peak in 2012 at 192 million units, the research firm says. 

Gray-market handsets are cellphones manufactured in China not recognized or licensed by government regulators. Makers of these products generally do not pay China’s value-added taxes and, therefore, profit illegally from their participation in the market. Such phones employ fake International Mobile Equipment Identity (IMEI) numbers, which are used by wireless networks to identify valid devices. These phones also do not carry test/quality certifications or network entry permits.

Exports, however, are shooting up, giving cause for concern to legitimate makers. “Because of its under-the-table status, China’s gray market has been difficult to size up,” said Kevin Wang, director, China Research, for iSuppli. “Chinese gray-market handset suppliers have become so successful that they are grabbing share from major international handset OEMs. Exports of gray-market cell phones are set to rise to 110 million units in 2009, up from 60 million in 2008. International consumers in both developed and developing economies are being lured away from established brands by the low cost of gray-market handsets.”

Ironically, the export explosion comes at a time when Chinese consumers are turning away from gray-market phones because these products often come up short in terms of after-sales service and quality and as consumers are gravitating toward brand-name products, Gray-market handsets typically enjoy a lifetime of only two years, due to poor quality control during the manufacturing process, iSuppli says.

Nearly all gray-market phones have 2-MP VGA cameras and Bluetooth connections, Wang added, with some smartphone models selling for less than $150.