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Shipments of smartphones for sale in China are set to soar by a record 53 percent this year, according to new research from the IHS iSuppli China Electronics Supply Chain service, from information and analysis provider IHS.

Domestic smartphone shipments in China will rise to 54.1 million units in 2011, up from 35.3 million units in 2010. Of the projected domestic total for this year, more than 10 million and 15 million smartphone units will come from the giant Chinese makers 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 of 25.9 percent from 2010. In contrast, the global smartphone market will grow at a more modest CAGR of 20.7 percent during the same period.

The China numbers do not include iPhones from Apple Inc. that have been smuggled into the country, or phones made by HTC that are sold in China—together estimated at somewhere in the range of 7 million units in 2010.

“China’s domestic smartphone market is booming in 2011 as prices for handsets and 3G services fall,” says Kevin Wang, director of China electronics value chain research at IHS. “Consumer demand also is being stimulated by the arrival of compelling mobile Internet applications.”

The average selling price for smartphones in China is set to fall below the $300 threshold in 2011 for the first time, declining to $299, down 4.9 percent from $314 in 2010.

Gray Skies Ahead for Gray-Market Handsets

Meanwhile in the Chinese white-box and gray-smartphone market, 2011 will see domestic Chinese suppliers focus mainly on EDGE smartphones based on the Android operating system, as well as 3G smartphones from 2012 onward.

Overall shipments of gray-market handsets, considered illegal in the country, are projected to expand to 255 million units in 2011 and then begin to decline to 213 million units in 2012. This will launch a pattern where gray-market handsets continue to decrease in unit shipments for the next four years.

While gray-market suppliers are positive about prospects in the emerging markets, a lack of new and compelling selling features will result in price-based competition.

This is true even in 2011, with the gray-handset market anticipated to see lower revenue despite an increase in unit shipments.

Existing players also may leave the smartphone space altogether to seek greater opportunities in other consumer electronic sectors, such as tablets.

Several factors account for the decline in the shipment of gray-market smartphones in China, including stronger supervision by the Chinese government of gray-market handsets and a serious crackdown on counterfeit mobile phones. Moreover, players in the emerging markets, supplying product to their own areas, are grabbing market share away from gray-handset suppliers.

In the second quarter of this year, IHS saw the closure of many small independent design houses for handsets in the Shenzhen area because of continuous losses, following the sharp decline of the export white-box and gray-handset market in April and May.

Channel inventory had been too high in the first quarter of 2011, while demand declined in the emerging markets during the second quarter.

Moreover, the Chinese government cracked down hard on gray handsets and the suppliers of counterfeit phones in Shenzhen during that time, adding to the pain of local gray-market manufacturers.

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