Mobile phone makers Nokia, Apple and Motorola are fighting it out with local Chinese phone makers such as Huawei for a slice of the world's fastest-growing smartphone market.
"The Chinese market offers a huge potential for growth. In the first quarter of this year alone, 72 million mobile phones were shipped in China. Only about 22 per cent of these were smartphones, representing a massive growth opportunity for smartphone vendors," says Daryl Chiam, an analyst based in Singapore with the research firm Canalys.
According to Canalys, China is the world's second-largest smartphone market, after the US and ahead of the UK and Japan.
In the first three months of this year, more than 15.8 million smartphones were shipped to China. This represents growth of almost 150 per cent compared with the same period last year.
For Nokia, Apple and Motorola, the Chinese market is increasingly crucial.
Canalys reports that for this year's first quarter, Nokia was the leading smartphone maker in China with 56 per cent of the market and Apple number two at 9 per cent. China is already the second-largest market for Motorola, which has a 7 per cent market share.
However, western manufacturers are facing growing competition with local Chinese phone makers such as Huawei and ZTE, who are catching up fast.
Huawei is now the number three smartphone maker after Nokia and Apple in China as a result of the popularity of phones such as the C8500.
Western manufacturers have little choice but to do battle with Chinese phone makers.
"With markets such as the US and Europe quickly maturing in terms of smartphone penetration, mobile phone makers are now increasingly making China the crucial pillar of their long-term business strategies," says Mr Chiam.
The Chinese smartphone market is wide open to foreign phone makers. Unlike more mature mobile phone markets, distribution is left to the free market. All across China, shops and stalls sell a variety of mobile phones over the counter.
"China is still a predominantly prepay market where phones are sold commonly through open distribution channels," says Mr Chiam.
"Phone vendors rely on distribution partners such as retailers and resellers to sell their products rather than being forced to go through mobile network operators.
"[But] major players still enlist Chinese operators to help sell their products. For example, Apple has signed an agreement with China Unicom for the iPhone."
Tim Shepherd, a Canalys analyst, says that while the vast majority of Chinese mobile users still use less sophisticated feature phones, many Chinese consumers are showing themselves to be eager to switch to smartphones for improved internet browsing, social networking and gaming. "It is a market with huge growth potential, particularly for competitively priced smartphones."
Despite the rapid expansion of the Chinese smartphone market, growth has been concentrated in urban centres, such as Shanghai and Beijing. Hundreds of millions of consumers across the vast hinterlands of rural China struggle to afford even basic handsets.
"Wealthy business people in urban centres own the most sophisticated smartphones, while farmers in rural areas rely on black-and-white, text-based screens to communicate with one another and learn English," says Julie Ask, an analyst at the international research company Forrester.
China is also home to some of the world's most skilled counterfeiters. Shanzai, or "bandit", phones have already swept the smartphone market.
In addition to straightforward counterfeit smartphones, some shanzai manufacturers have managed to establish a reputation for innovation, much to the anger of phone makers such as Nokia.
The shanzai phone makers manage to produce small product runs to test the market for new phones, cutting the traditional nine to 12-month industry product cycle down to three months.
According to the research firm IHS iSuppli, overall unofficially traded handset shipments will grow to 255 million units this year and then begin to decline to 213 million units next year. Several factors are thought to account for the coming decline in the shipment of grey-market smartphones. These include a serious crackdown on counterfeit mobile phones and stronger supervision by the government of all grey-market handsets. Other factors include concern from customers about the quality and after-sales services of the bandit handsets.
But IHS iSuppli also believes that dominant local players such as ZTE and Huawei are grabbing market share away from the illegal suppliers.
The gradual demise of counterfeit products as the market matures would be excellent news for western manufacturers, who have a huge interest in legitimising the Chinese market.
As China becomes an increasingly important market, its tastes will play a growing role in shaping the design and functionality of future smartphones.
