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The Dirty Secret of the Global Telecom Boom

By Larsen Kusick, analyst, Phase 1 Investor
Friday, December 17, 2010

Last week, I highlighted the bright, cheerful side of the booming Chinese cell phone market. Today, I want to show you the darker side... a trend that is crushing part of the market.
 
Millions of Chinese customers will be buying iPhones over the next year. As I pointed out last week, the result will be huge growth for Apple and China Unicom. However, millions MORE will buy phones that don't have a brand name on them.
 
In fact, for every iPhone that Apple sells worldwide, there are 10 no-name brand phones sold.
 
 
These phones are called "white box" products. It's a polite name for products that are often closer to the black market. In emerging markets like China, these white-box phones are a HUGE business. And the latest data from IT research leader Gartner shows how these no-name phones are eating into the market share of phone manufacturers like Nokia (NOK).
 
According to Gartner, 417 million phones sold worldwide during the third quarter of 2010. (That's up 35% compared to last year – huge growth.) One-third of all phones fall into the "other" category, meaning they didn't come from one of the top 10 manufacturers.
 
Gartner analyst Carolina Milanesi said, "In the third quarter, white-box manufacturers continued to expand their reach outside of China into markets such as India, Russia, Africa, and Latin America."
 
She added, "We firmly believe this phenomenon will not be short-lived... Although we have seen acceleration in sales this quarter, we expect an even bigger volume in the fourth quarter of 2010."
 
Here's how that's playing out for Nokia...
 
 
Nokia
Other
Q3 2009 Units
113,466
49,871
Market Share
36.7%
16.1%
 
Q3 2010 Units
117,461
137,798
Market Share
28.2%
33.0%
 
Year-Over-Year Sales Growth
3.5%
176.3%
Change in Market Share
-8.6%
+16.9%
 
As you can see in the table above, these white-box phones are KILLING Nokia. Even though it grew sales by 3.5%, it's losing a ton of market share to these no-name brands.
 
(Meanwhile, Apple's phone sales have almost doubled over the past year. China's two biggest phone makers, ZTE and Huawei, are growing sales at a 45% and 64% clip, respectively.)
 
Here's the lesson for investors: Be careful with major phone manufacturers, like Nokia, that sell cheap phones. White-box phone makers will continue to ruin the low end of the market even as the global cell phone market booms over the next year.
 
The better play is to go with a company like China Unicom, which can make money off high-end iPhone users AND those who buy no-name phones. Regardless of what phone you buy, you have to pay China Unicom to use its network.
 
Companies that make the small parts for phones are also a solid play. And I still like the big semiconductor index – SMH – as a long-term play on the "gadget boom."
 
Good investing,
 
Larsen




Further Reading:

"Verizon isn't growing anymore," Larsen wrote earlier this week. "Neither is AT&T... If you want growth, you have to go to China." See what Chinese "trophy stock" you should keep an eye on here: Meet the Little-Known Company Bringing the iPhone to China.
 
Hundreds of millions of consumers in China and India have caught on to the tech boom. "This is a huge, long-term trend that could be good for hundreds of percent gains," Larsen says. "And it's just getting started." Get the full scoop here: Tech Investors Are Ignoring the Start of a Big Bull Market.

In The Daily Crux
Market Notes
Energy fund XLE up more than 20% in three months, topping all major sectors.
 
Software giants Oracle, Intuit, and BMC all jump to fresh highs.
 
Gold rally takes a break… prices drop to lowest level so far in December.
 
Silver small-cap Hecla Mining up more than 70% in three months.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1242.87 +0.6% +12.1%
Oil 37.77 -0.6% +2.8%
Gold 133.81 -0.7% +19.9%
Silver 28.28 +0.7% +62.9%
U.S. Dollar 80.24 +1.1% +4.3%
Euro 1.32 +0.2% -8.9%
Volatility 17.39 -3.1% -15.3%
Gold Stocks 557.67 -1.7% +24.8%
10-Year Yield 3.48 -1.1% -3.3%

World ETFs
Symbol Price
Change
52-Wk
USA 124.82 +0.6% +11.9%
Canada 30.46 -0.4% +16.5%
Russia 22.20 +0.4% +20.5%
India 37.31 +1.8% +23.1%
Israel 17.30 +0.7% +13.2%
Japan 10.75 +0.6% +7.2%
Singapore 13.49 +0.4% +16.9%
Taiwan 15.24 +1.5% +23.1%
S. Korea 58.13 +1.0% +22.5%
S. Africa 72.22 +0.6% +27.8%
China 42.60 -0.4% -0.8%
Lat.America 52.22 +0.4% +7.6%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.10 +0.5% +14.4%
Big Pharma 65.62 +0.2% -1.4%
Internet 72.94 +0.7% +29.1%
Semis 16.31 +1.1% +25.2%
Utilities 31.36 +0.9% -0.9%
Defense 18.67 +1.0% +8.4%
Nanotech 9.92 -0.3% -1.4%
Alt. Energy 10.24 +0.4% -5.2%
Water 19.39 +0.8% +14.9%
Insurance 16.46 +0.0% +20.1%
Biotech 21.78 +1.4% +33.5%
Retail 19.69 +0.7% +24.7%
Software 25.36 +1.1% +26.6%
Big Tech 54.58 +0.8% +23.0%
Construction 13.71 +1.0% +15.0%
Media 13.88 +0.4% +19.0%
Consumer Svcs 67.57 +0.9% +21.3%
Financials 55.84 -0.1% +8.5%
Health Care 65.96 +0.7% +3.1%
Industrials 65.08 +1.0% +21.5%
Basic Mat 74.95 +0.7% +25.4%
Real Estate 53.79 +0.3% +18.1%
Transportation 92.07 +1.3% +22.0%
Telecom 23.17 +0.2% +16.8%

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