Chinese mobile phone manufacturers are at a crossroads.

Despite a great variety of promotion manoeuvers, they remain very vulnerable confronting ferocious market competition at home and abroad.

Latest government statistics show that domestic handset vendors are losing their dominance with market share shrinking from about 50 percent last year to 38 percent in the first half of this year.

As a matter of fact, many handsets companies' first-half fiscal reports show that they are back to struggling for survival again, failing to continue their glory of last year.

Leading domestic handsets vendors including TCL, Bird, Amoi and the Chinese Kejian all witnessed diminishing handset sales.

TCL, for example, posted a net profit of US$302 million for the first half of the year, representing a decline of 34 percent from a year earlier. The market share it occupied was down from 9.7 percent early this year to 8 percent at the end of June.

Bird also announced that because of the price wars ensuing from fiercer competition in the domestic market, the company's revenue was down by 19.2 percent to 4.65 billion yuan (US$560 million) in the first half of the year.

Fiercer competition

Low prices and localized marketing strategies are no longer a particular magic weapon for domestic vendors as foreign players have quickly learned to slash prices and reform selling channels.

International handset vendors such as Motorola and Nokia are regaining strong momentum in the domestic market by launching new products as well as lowering handset prices.

The lacklustre performance of domestic vendors partly reflects that foreign players are moving along the right track to consolidate market share.

Figures from CCID Consulting Co Ltd show that Motorola is ranked the number one handset vendor in the first half of the year, with sales totaling 4.08 million units, commanding 12.05 percent of the total market share.

On the other hand, market share for Bird has dropped from 15 percent last year to 9.57 percent in the first half of the year, now ranking fourth.

Price cutting initiated by foreign players such as Nokia made domestic handset makers lose their competitive edge low prices.

"The sales decline of domestic handsets will lead to stock increase. This is in no way a good news," said Huang Zhongtian, general manager of Konka Telecommunications Science and Technology Corp.

Constant price wars have also caused profit shrinkage for the handset industry.

Sources indicate that gross profits for domestic handsets are down from 28 percent in 2002 to 21 percent last year.

In the first half of the year, the gross profits for Konka, Bird and TCL was 11.5 percent, 17.5 percent and 19 percent, respectively.

Li Dongsheng, board chairman of TCL Corp, believed that the decline of TCL's half-year performance is mainly because of slow domestic demand, foreign players’ tough competition and the inability to launch new products.

"It is of vital importance to upgrade handsets quickly," Li said.

Weaknesses in research and development and loose supply chain for handsets are also major reason for the lack of new products, he said.

It is reported that the output of handsets in China this year is likely to pass 170 million units year, while the domestic demand is for no more than 96 million units.

Domestic handset makers are lagging far behind foreign players in rolling out attractive new products, analysts say.

Nevertheless, some analysts say they believe that the decline of the market share for domestic vendors is quite temporary as companies are heading into an adjustment stage after years of rapid expansion.

In another development, with the tough competition, the domestic handset industry is facing a reshuffle in the next two to three years.

"In the near future, only about 10 to 15 handset manufacturers will survive in the market," Li Dongsheng said.

Currently there are more than 40 handset vendors in the domestic market.

Brian Lu, president of NEC (China), agreed that there will be only about 10 handset manufacturers in the domestic market in the near future.

NEC Corporation has readjusted its business framework in China, concentrating on research and development of 2.5G and 3G-related terminal handsets and network equipment.

Lu says in three years NEC's revenue from the Chinese market is to account for 40 percent of NEC's overseas market share.

"3G is the key element to ensure the realization of the target," Lu said.

Of course, NEC (China) Co Ltd is not the only company which is betting a lot on China's lucrative handsets industry.

Major foreign telecoms gear makers, such as Nokia, Siemens, Ericsson, and Alcatel have invested large amounts of money in R&D in China to grab bigger market share.

Megapixel handsets

Riding against sluggish growth, megapixel handsets, touted as a revolutionary technology, are seen as becoming a life buoy for domestic handset makers to compete side by side with foreign competitors.

Almost all the major domestic handset vendors have vowed to unveil megapixel handsets that will lead the market trend, including TCL, Konka and Haier.

Analysts say they believe that the drop in the handset sales in the second quarter of the year provided an impetus for domestic handset vendors to churn out more attractive products to lift the market.

Figures from the MII indicate that a total of 15.8 million handsets were sold (including 13.7 million GSM phones and 2.1 million CDMA phones) in the second quarter of the year, down 23 percent from the previous quarter.

Hoping to embrace new opportunities, Konka Corp became the first domestic handset company to launch its megapixel handset T100.

"It is a combination of many functions including handset, PDA and digital camera," said Konka's Huang Zhongtian.

"We are aiming to further promote megapixel handsets in coming months as high pixels and high resolution will become mainstream for handsets," he said.

Konka is going to launch another five similar phones with even higher pixel ratings during the rest of the year.

Nevertheless, analysts say they doubt that megapixel handsets will be really strong enough to help domestic handset vendors to get out of their difficulties.

Key issues need to addressed to build the popularity of megapixel handsets such as price, they say.

Currently the price for a megapixel handset is set between 4,000 to 5,000 yuan (US$480 to US$600).

Xie Linzhen, deputy chairman of China Mobile Telecommunications Federation says he believes that the birth of the megapixel handset means that the competition of China's handset market has developed from merely a low-end market to a whole range of products.

Figures from Sino-Market Research Company, an domestic IT consulting firm, showed that by the end of May this year, the color screen handset has dominated with its market share soaring to 78 percent.

Meanwhile, handsets with embedded digital camera occupied about 20 percent of the market share.

"But to gain a firm foothold in the domestic market, domestic handset makers have to increase their innovation ability as well as seeking cooperation with competitors," said Zeng Jianqiu, a professor with Beijing University of Post and Telecommunications.

"Domestic handset makers should spend more on research and development to master more key technologies," he said.

Meanwhile, teaming up with international big names will become a promising way to become stronger in both the domestic and overseas markets, he said.

Zeng hailed cooperation between TCL and Alcatel in establishing a joint venture in Hong Kong, which is expected to be completed during the third quarter of 2004.

The JV is for the research and development, sales and distribution of mobile handsets and related products and services.

And the JV and TCL combined will have an extensive sales network offering coverage in China, Latin America, Europe and the rest of the world addressing major operators and distributors.

It is further envisaged that the JV will benefit from ownership of all Alcatel mobile handset patents and from licenses of other patents together allowing the JV to compete effectively in international markets.

"Competition as well as cooperation should be the trend for the development of domestic handset manufacturing industry," Zeng said.

(China Daily September 15, 2004)