Wednesday November 21 5:11 AM ET
Chinese Mobile Handset Makers Find Own Market Tough
By Tony Munroe and Jonah Greenberg
HONG KONG/BEIJING (Reuters) - When Zhang Heirong makes a sales pitch in his modest Beijing
mobile phone shop, customers often have little interest in the domestic-brand models that gleam
behind glass display cases.
``Although it's a bit better now, if you were to say 'domestically made', people would think of the
most clumsy, oldest and worst model,'' Zhang said recently. ``Chinese consumers don't really have
enough confidence in the domestic brands.''
It is a bitter irony for Chinese manufacturers that in what has fast become the world's biggest mobile
phone market, most customers are far more likely to buy handsets offered by foreign firms like
Motorola Inc and Nokia (news - web sites).
While local phone makers such as Ningbo Bird, China Kejian Co and the TCL Group are gaining
momentum after a late start, they have a tough time competing with the range and value offered by
foreign vendors, market watchers say.
Gartner Group analyst Nick Ingelbrecht figures Chinese-branded handsets will account for just nine
percent of those shipped in the mainland this year, and expects that will increase to roughly 14 percent
by 2003 and 21 percent by 2005.
China has a world-leading 136 million mobile users, and is adding five million a month, meaning that
owning even a small share of the overall market can translate into big sales.
JP Morgan expects 69 million handsets will be sold in China this year at an average price of $181.16,
for a market worth roughly $12.5 billion.
Foreign companies ``start off with a very strong brand, they start off with very strong products, and
the Chinese vendors have been very hard put to match those both in terms of quality of products and
in terms of pricing,'' Ingelbrecht said.
U.S.-based Motorola and Finland's Nokia dominate the China handset market, with shares estimated
by JP Morgan at 30-32 percent and 25-27 percent, respectively. They are followed by Germany's
Siemens A.G., Samsung Electronics of South Korea (news - web sites), and Ericsson (news - web
sites) of Sweden.
Most of the handsets they sell in the mainland are made in China.
PRICING POWER?
The deeper that mobile phones penetrate into China, the more cost-conscious the average customer
becomes, creating opportunities for local players willing to compete on price.
But price competition cuts both ways.
Motorola snatched up market share this year on the strength of its lower-priced T189 model, which
sells for about $157. A company official said recently that phones selling for 1,500 yuan or less
accounted for about 60 percent of the China market in June, compared with 20-25 percent in early
2000.
``(Foreign firms) can actually drive the price down to the same level as the domestic players,'' said
Credit Lyonnaise Securities Asia analyst Jerry Lu.
``If you look at other markets, the Chinese vendors really have a big cost advantage. In the handset
market, they don't. It really comes down to how good they are at marketing.''
China's home-grown handset industry only dates to 1999 and domestic vendors don't enjoy the cost
advantages they do in other sectors because they must buy the core technology -- the chips -- from
providers such as Motorola, Lu said.
Some local players have made headway, however.
White goods giant TCL, whose affiliates include TCL International Holdings Ltd and TCL
Communication Equipment Share Co, sold more than 600,000 handsets in the first nine months of the
year, Lu said.
TCL targets high-end users with models for 2,500-3,000 yuan, ``not any cheaper than foreign
brands,'' notes international investor relations manager Shirley Yau.
TCL, which this week became the first mainland vendor licensed by Qualcomm Inc to make handsets
based on the next generation of CDMA (news - web sites) mobile technology, said its competitive
edge is a well-established brand with a big distribution network.
``Because we've been in the electrical appliance business in China for a long time, we have a better
grasp of our customers' needs in areas such as the appearance and functions of handsets,'' Yau said.
Indeed, the success of TCL and other domestic players in the television business demonstrates that
Chinese firms can dominate a market once owned by foreign brands.
``People do not necessarily just go for international names blindly,'' said CLSA's Lu.
SALES RACE STARTING AGAIN WITH CDMA
In what Beijing hopes will provide a boost to local cellular equipment makers, carrier China Unicom's
parent will soon throw the switch on a nationwide CDMA-standard network that will run alongside its
GSM network, with first-phase capacity of 15 million users and plans to accommodate 50 million.
Where overseas handset vendors enjoyed a first-mover advantage supplying GSM handsets,
competition will start afresh with CDMA. Among the 19 companies licensed by Beijing to make
CDMA phones in China, Motorola is the only foreign firm.
JP Morgan analyst Robert Lewis said that the single source of CDMA technology (Qualcomm)
eliminates a technology gap between local and foreign vendors. Several Chinese firms are teaming
with Korean makers of CDMA gear to tap their expertise.
``If Chinese manufacturers can capture a healthy slice of that market, then they're going to do quite
well. It's going to help them increase their market share,'' said IDC's Ingelbrecht.
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