Asia Pacific Watch

February 11, 2003
Chinese mobile handset manufacturers gear up

Duncan Clark

CHINA -- China entered 2003 with over 200 million mobile subscribers and an ever-growing slice of global foreign direct investment by telecom and technology manufacturers. In addition, mobile handset sales in 2002 were approximately 60 million, up from 50 million in 2001. In the eyes of the world's leading mobile handset manufacturers, the appeal of China is obvious -- both as the largest market and the most attractive workshop.

The market scenario
The domestic vendors increased their market share in 2002. Nevertheless, as there were a large number of players in the market, no one could make big profits. In fact, the total number of handset manufacturers licensed by China's Ministry of Information Industry (MII) is no less than 36. Most of these players are domestic firms that are benefiting from the recent permission to import chipsets and modules and to outsource design.

With the barriers to entry disappearing, players with backgrounds as diverse as consumer electronics, white goods, IT and military electronics have entered the fray. China Unicom's deployment of a CDMA network has also spurred on local manufacturers. Eighteen of the 19 CDMA players licensed by the MII are domestically controlled.

The domestic players are no doubt ambitious and serious. China is currently experiencing a large increase in manufacturing capacity. For example, TCL recently expanded its production line to a capacity of 15 million. Ningbo Bird recently announced that its production capacity had topped 20 million.

Since consumers are looking for a wide range of choices, the number of handset models on the market has increased. Currently, there are over 300 models on sale, compared to less than 50 a few years ago. This has created new risks for manufacturers, as the market might reach a saturation point with a large number of products from different players.

Sales prices dip in Q3 2002
The fall in the prices has led to the increase in sales. The average sales prices have dipped to under RMB 1,600 in Q3 2002. However, these prices still offer substantial margins to successful players. Domestic brands typically have to offer a higher commission to their sales channels. The domestic players also face challenges in building efficient after-sales service networks. However, low volumes can typically mean that they often resort to outright replacement of faulty phones, rather than coordinate timely repairs.

While domestic manufacturers have begun developing their own export channels, these pale in comparison to the export volumes of multinational manufacturers in China. As part of its efforts to transform itself into a manufacturing powerhouse, China has required multinational players to export a healthy percentage of their output in China. The 1998 'Circular No. 5' issued by the MII and State Development and Planning Commission imposed a minimum export requirement of up to 60 percent on foreign and joint-venture manufacturers. Although not fully enforced and recently relaxed, this has actually helped contribute to a healthy diversification of customer base of multinational players in China.

Domestic manufacturers targeting important markets such as Europe face competition from multinationals, as well as other aggressive Asian rivals in Korea and Taiwan. The leading international vendors such as Motorola, Nokia and Samsung continue to dominate the market, accounting collectively for approximately 80 percent of China's mobile handset market.

Access to capital will also be an essential determinant of success. While many domestic vendors continue to enjoy cozy relationships with local governments or banks, further concerns of a handset glut would prompt lenders to cut credit.

The domestic handset manufacturers face stiff competition at home and an uphill struggle in selling abroad. Hence, consolidation appears inevitable. The few companies that thrive in this intensely competitive market, however, are likely to emerge with a good shot at becoming global players. If they can make it there, they can make it anywhere.

(The author is managing director of BDA China Ltd, a technology and telecom consulting and research firm based in Beijing)