China's Handset Manufactiring Market Analysis
>> Competitive Analysis of Handset Market
Tang Gang
ChinaNex
04/2003
chinanex.com
In early 1999, the MII issued a policy called "No. 5 Directive" which required any company in China must apply for a license from MII for handset production and sales. The new policy fostered the number of eligible handset companies from five in 1997 to 37 in 2002, and total production capacity reached 200 million sets. Three major production sites have gradually taken shape, including nine companies in Beijing, nine in Guangdong and six in the Yangtze River Delta region; together their production makes up 91% of national total.
At present, 13 Chinese companies have obtained permission for GSM production, they include Kejian, Konka, ZTE, Soutec, Eastcom, Bird, TCL, CapiTel and Haier. There are 19 companies in CDMA handset production, all of them are Chinese companies except Motorola.
According to a survey by MII on 35 companies, total investment reached 5.1 billion yuan ($608.4 million) in 2002; foreign investment in capital equipment and R&D has risen to $17 billion in recent years (cumulative) as all major companies closed plants elsewhere and moved production to China.
This table lists production of major companies in 2002 (in millions; including exports).
GSM CDMA Total
Foreign Brands 87.28 11.65 98.93
Motorola (China) 23.19 8.18 31.37
Eastcom (JV) 4.46 1.67 6.13
Nokia (Dongguan) 16.67 16.67
Nokia (CapiTel) 15.62 15.62
Siemens (Shanghai) 11.56 11.56
Ericsson (Beijing) 3.46 3.46
Alcatel (Suzhou) 2.08 2.08
Matsushita (Beijing) 2.48 2.48
NEC Mobile (Wuhan) .42 .42
Samsung (Kejian) 1.50 1.50
Domestic Brands 28.95 3.48 32.43
TCL Group 6.22 .01 6.23
Bird 7.22 .27 7.49
Kejian 2.08 2.08
Panda Electronics 2.01 2.01
Haier Group 1.79 .26 2.05
Amoisonic 2.11 2.11
Konka 1.8 .25 2.05
Eastcom 1.64 .48 2.12
Soutec 1.09 .52 1.61
CapiTel 1.03 .02 1.05
National Total 116.23 15.13 131.36
Foreign Brands
To a great extent, the future of the handset market will be led by innovation, where foreign brands enjoy an upper hand in core-technology, superior operations and innovative products to turn to strong profit. Specifically,
* Their ability of dealing with changing market conditions has improved; new designs will bring about market potential, especially in games, imaging and enterprise sectors. Foreign brands will continue their leadership position in R&D, brand recognition, technology, product positioning and production volume
* New products like MMS, Java applet, browser-based, and color LCDs
* Full coverage in mid- and high-end sectors with competitive pricing to gain market share; profit from high-end sales will offset cost in low-end products
* Increasing production with designed capacity of 50 million. If delivered, plus domestic brands, total production in 2003 will exceed 200 million
Domestic Brands
Overall, the Chinese brands made remarkable breakthrough in 2002. Excluding exports, share of domestic brands rose to nearly 40% (MII figures) with rising production and sales. Since last February, TCL and Bird have jumped to the ten largest handset makers in China, only after Motorola, Nokia and Siemens. Meanwhile, share of production of Chinese brands rose steadily from 12% in 2001 to 22.8% in 2002; sales form 11.9% to 21.7%.
The main reason for the achievement was a good understanding of local conditions which led to identifying current trends and fast turnover of new products. In fact, the Chinese brands have a much faster time to market than foreign competitors. In addition, the Chinese brands are very competitive in performance-to-price ratio, as well as in variety and form factor design.
R&D
For Chinese companies that do not own IPR for core handset technologies, they have to go through imports - SKD - CKD - independent R&D. During this time, some Chinese companies had to endure the embarrassment of making identical products with foreign brands which undermined their sales.
Now major Chinese handset companies are emphasizing R&D with increased investment. They have realized R&D in core technology is not only a must to gain market shares, but also assurance for long-term growth. For example, TCL, Bird and CapiTel have begun research in handset board and key software; ZTE spends 10% of revenue in R&D; Haier is setting up R&D offices in Europe, the US and Hong Kong. Meanwhile, Chinese companies have stepped up cooperation with foreign competitors.
In general, Chinese companies have gained a fair grasp in handset structure and form factor design, application software development, RF module and volume production. They are also making progress in core chipset and data link-level applications. Chinese companies can make handsets with self-designed RF and baseband circuitry, built-in MP3, PDA and camera. Other progress is seen in SIM card, AsGa switch, LCD, Li-Ion battery and others. Some of these parts have received certification from major handset makers like Motorola, Nokia and Siemens for mass production.
Market Competition
While the Chinese brands still lag in product strategy, they are ahead of secondary foreign companies in product design, production, coverage of product category and pricing.
Because the handset industry is highly fragmented in parts supply and assembly, many "traditional" advantages used to be controlled by large multinational companies have been replaced by smaller companies that are highly flexible and efficient. For example, mainstream style has changed from European "straight" face design to the flip model started in Japan and South Korea. In China, dual color LCD, multiple string rings, MMS, multimedia, MP3 will become trend setters. Specifically,
* As functionality becomes increasingly identical, form factor design will be the direction for Chinese companies
* Color LCD, new channel for GPRS and CDMA 1X
* Future platform such as Java, MMS and bluetooth
* Capability in video imaging, video camera lens, pics transmission
However, because many Chinese companies are still behind in key technologies, most effort will be made in appearance of handsets in order to maintain an adequate price level, hence profit.
As handsets have become commonplace, the major driver for growth in the future will be average consumers. Different from luxury goods, a key characteristic of mass products is variety and low price; main sources for product information include advertising in mass media, retail shop posters and pitch by salesman.
According to an MII survey on handset trends, 60% of consumers prefer handsets priced between 1,000-2,000 yuan ($120-240), compared to less than 6% for 3,000 yuan ($360) or higher. The majority of consumers are interested in fashion design, and most handset users are 20-45 years old.
Scale of Operation: Key to Competitive Advantage
Large-scale operation can help expand market, reduce cost and increase spending on R&D, which lead to a company's competitive advantage. Scale of operation determines cost per unit (including R&D, production, marketing and others).
For example, a company that makes 10 million handsets can have revenue of 20 billion yuan ($2.4 billion) a year (average 2,000 yuan per set). If the company invests 10% of its revenue or 200 million yuan ($24 million) in R&D, each handset will share cost of 20 yuan ($2.4). If the same ratio applies to another company making 1 million handsets a year, each handset will carry 200 yuan ($24). Clearly, with same level of R&D spending, the latter will not deliver significant competitiveness.
Using scale production as a strategy, when a company launches a new product, cost per unit is actually decreasing which becomes the basis for price cutting. This approach differentiates one from its competitors by the price gap. As a result, companies with small operation scales and copycat technology/products will eventually be pushed out of the market.
While increasing production is critical for scale of operation, companies must also remember market conditions always keep changing, and only those products that meet customer demand will win. Therefore, handset makers must have an intimate feel about market "pulse" in order to keep their products "fresh" to customers.
Advertising
Advertising is an effective approach to creating a corporate image and increasing product awareness. Spending for handset advertising has been rising rapidly to 700 million yuan ($84.3 million) in 2002, triple the level in 2001. For advertising in print media, statistics show overall spending grew 62.4% in 2002 to over 800 million yuan ($96.4 million), in which foreign brands held 58% and domestic brands 42%. Except Motorola and Nokia, difference in ad spending between Chinese and foreign handset companies is very close. TCL and Amoisonic, for instance, spent 85.8 million ($10.3 million) and 52.4 million yuan ($6.3 million) during the year, more than that for Samsung, Siemens, Alcatel and Ericsson.
Sales Strategy
In recent years, Chinese brands are also gaining an upper hand in sales channels. As the result of rapid growth, high margin for the entire industry has decreased to average margin. There are essentially two ways to cut cost, production and sales. Unfortunately there is very little room in production area as every has been squeezed to a minimum. Therefore, companies are turning to sales for solution.
In sales, most cost occurs in channel development and maintenance; companies must find a balancing point between expanding sales and reducing associated costs. Most foreign companies use sales agents in China who distribute products to a large number of resellers and retail shops. The problem with this approach is that most agents are only interested in selling products not customer support. Chinese brands, especially TCL, Haier, Amoisonic and Konka, have many years of sales experience in China, especially in second- and third-tier markets. With well established channels in these areas, they have sold products successfully without sacrificing customer support. This approach has effectively reduced sales cost and helped push up share by domestic brands.
The following table shows the number of handset service shops by major companies:
Foreign Service | Chinese Service
Companies Sites | Companies Sites
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Motorola 280 | Bird 82
Nokia 432 | TCL >300
Ericsson 203 | Kejian 174
Samsung 13 | Eastcom 34
Matsushita 110 | Konka 290
Alcatel 144 | Amoisonic 97
Competition in the channel market has escalated since 2002 as an army of new players have joined the foray, many of them have established strong sales presence in a given market. For example, several electronics mega stores have begun to sell handsets. Distributors for IT products have also turned to handsets. Other formidable competitors have also joined force, including large home appliance chains and even mobile operators such as China Mobile and Unicom.
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