The massive grey market for cellphones is propelling sales of lower-cost flash memories like embedded multimedia card (eMMC) and serial peripheral interface (SPI) NOR, as manufacturers of the unregulated phones strive to keep production costs low.

Shipments of grey market cellphones are set to amount to 210-million units in 2012, representing 13% of the global mobile handset business, according to an IHS iSuppli Mobile & Embedded Memory Market Brief from information and analytics provider IHS. While this is down from the peak year of 2011, when gray market totalled 250-million units, shipments are set to remain high, amounting to 189-million units, or 11% of the global cellphone shipments in 2013.

The grey market business is dramatically larger than it was just three years ago in 2009, when shipments amounted to 145-million units.

“Grey-market phones represent a huge segment of the overall mobile handset industry,” says Michael Yang, senior principal analyst for memory & storage research at IHS. “For manufacturers of these phones, keeping up with consumer trends while maintaining low costs will continue to be a concern as they fight to remain viable in a fiercely competitive market. As a result, the adoption of inexpensive flash memories like eMMC and SPI NOR have been a key trend in the segment for grey-market handsets.”

Grey-market handsets are cell phones manufactured in China that are 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.

The grey market for mobile handsets thrives mostly in developing countries where a large underground economy exists and where people are keen to obtain phones at low prices bearing desired functionalities – often those copied from authentic handsets made by name brands.

In China, for instance, grey-market handsets include counterfeits as well as so-called white-box units in which any logo can be slapped on a ready device. Frequently these white-box phones also feature smuggled chips, lack official certification and use fake international mobile equipment identity (IMEI) codes otherwise used to distinguish genuine handsets.

Asia, including China, remained the top opportunity, accounting for 62% of the grey market in 2011. Growth sectors like Indonesia and Vietnam are also moving beyond low-cost grey market handsets into grey-market feature phones, which are considered a step above low-cost handsets because of slightly more sophisticated functionalities.

The next two growth segments for the grey market are Latin America, which skews more toward low-end smartphones, as well as the Middle East/Africa (MEA) region, where entire new populations are being exposed to mobile devices for the first time.

As a whole the grey market for handsets is also steadily moving upstream, with smartphones rising from 1,4% of gray-market handset shipments in 2011 to 6% this year. Feature phones, however, will continue to command the lion’s share of grey-market handset shipments this year, at well over 60%.