Shown is a forecast of China's domestic smartphone shipments (in thousands of units).

CHINESE SMARTPHONE shipments will increase by a record 53% this year, according to new research from the IHS iSuppli China Electronics Supply Chain service. Domestic smartphone shipments are predicted to rise to 54.1 million units in 2011up from 35.3 million units in 2010. Of this year's projected domestic total, more than 10 and 15 million smartphone units will come from ZTE and Huawei, respectively.

By the end of 2015, IHS forecasts that Chinese companies will ship 111.6 million smartphones, rising at a compound annual growth rate (CAGR) of 25.9% from 2010 (see figure). In contrast, the global smartphone market is predicted to grow at a more modest CAGR of 20.7% during the same period. It is important to note that these numbers do not include iPhones smuggled into China or HTC-manufactured phones sold there. Together, these accounted for an estimated 7 million units in 2010. Coinciding with this year's increase, the average selling price for smartphones in China is set to fall below the $300 threshold for the first timedeclining to $299.

Domestic Chinese suppliers are expected to focus primarily on Android-based EDGE smartphones in 2011 as well as third-generation (3G) models from 2012 onward. Overall shipments of "gray-market" handsets (considered illegal in China) are projected to expand to 255 million units in 2011, followed by a decline to 213 million in 2012a downward trend that is expected to continue through 2015. This decline is being attributed to several factors including stronger government supervision, a crackdown on counterfeit mobile phones, and players in the emerging markets grabbing additional market share. Other problems facing gray handsets include the following: concern from end customers about their quality and aftersale services; the difficulty they face in differentiating themselves from similar platforms; and the absence of a competitive 3G turnkey solution.

Gray-market suppliers have remained positive about prospects in the emerging markets. But a lack of new and compelling selling features is expected to result in pricebased competition. Even this year, with the projected increase in unit shipments, lower revenue is anticipated. Some existing players may leave the smartphone space altogether to seek opportunities in other consumer-electronics sectors.