Here is an industry where the multinationals are apparently beating the local competition in China. How can that be possible?
Alarm bells ring for Chinese cellphone makers
By Doug Young Thu Jul 28,10:03 AM ET
SHANGHAI (Reuters) - Global cellphone giants like Motorola Inc. and Nokia N.V. have got their act together in China, putting pressure back on the home-grown rivals who stole the initiative in recent years.
Barely a week has passed since June without word of a crisis at one Chinese firm or another. A series of announcements and local media reports have warned of profit plunges, credit crunches and payment defaults.
Analyst say that by late last year, the multinationals finally learned how to compete with the likes of China's TCL Communication, Ningbo Bird and Kejian in a market that buys one of every eight cellphones sold worldwide.
Copying the local groups' business models, Motorola and Nokia have introduced low-end models this year and strengthened their distribution in less affluent smaller cities and towns that are home to the majority of China's 1.3 billion people.
As a result, domestic handset makers have seen their combined share of the China market drop to 38.3 percent in June from 41.2 percent at the end of last year, off from a peak of 58.7 percent by the end of 2003, according to Norson Telecom Consulting.
"Up until 2004, the local handset vendors saw their market share grow quickly," said Norson analyst Chris Han. "Their main advantages were distribution and low prices. But most of those advantages have disappeared from 2004."
Analysts said the domestic malaise is likely to continue for much of the next year, as many smaller players bow out of the industry altogether or are forced into bankruptcy, and a few major manufacturers survive.
China is the world's biggest cellphone market by subscribers, with 350 million, and 100 million units are sold into the market every year. A recent survey put sales worldwide this year at 779 million.
RED OPERATIONS
The recent list of warnings has rung steady for the last few months, involving large and small players alike.
Ningbo Bird, the nation's largest domestic player, warned earlier this month it had slipped into the red in the second quarter, joining main rival TCL, lossmaking since the end of last year.
Other Chinese companies cited in local media as operating in the red include Eastern Communications Co. Ltd., also known as Eastcom, and Amoi Electronics Co. Ltd.
Kejian, once a fast-rising star, is now struggling under a mountain of debt it is in the process of trying to restructure, according to one report this month.
They and other publicly traded domestic players are expected to report losses when they announce their second quarter earnings in the weeks ahead.
In another case, local media reported late last month that Soutec (Group) Technology Co., a former industry leader in affluent Guangdong province, had shut down. The reports said a lender who was owed 20 million yuan ($2.5 million) had sought a court order for the move.
Analysts predict the domestic industry's woes are likely to continue into most of 2006, with many mid-tier players going belly up or quitting the business by the time the dust settles.
Players most likely to weather the storm include larger ones like TCL and Ningbo Bird, along with ones that are big in other areas such as telecoms equipment giants ZTE Corp, Huawei Technologies and PC leader Lenovo Group Ltd., said Gartner analyst Nick Ingelbrecht.
"We're going to see consolidation among existing players in the market," he said. "We're going to see increasingly concentrated market power in terms of the top manufacturers."
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