Emol Communications was a little-known firm when it was founded in 2001, competing for a slice of China's sizzling mobile phone market. Only one year later, it earned huge profits, despite having no handset manufacturing licenses.

With 2004 coming to a close, it is now on the brink of bankruptcy.

Though bull and bust is the norm in the business world, Emol's upturn and downturn confirms a dramatic U-turn of the whole mobile phone industry in China, analysts said.

Emol's plight has also shed the light on the country's long-held mobile phone licensing scheme, they said.

In China, all companies need to apply for a government license if they intend to manufacture and sell mobile phones.

Feeling the sting of a lack of licenses, Emol leased licenses from phone maker Nanjing Panda.

Now it owes Shanghai and Hong Kong-listed Nanjing Panda 162 million yuan (US$19.52 million) and another firm, SVT Group, 506.5 million yuan (US$61.02 million).

Emol is not able to pay back the debts and has ceased operations. In October, the firm had 93 million yuan (US$11.2 million) in net assets.

"There are only two ways out now for Emol: either go bust or be restructured," said Wang Guoping, an analyst with China Galaxy Securities in a research note.

"The heydays for domestic mobile phone makers are gone."

Wang was referring to the days when almost any mobile phone firm could make fast money in a largely lucrative mobile phone market.

Chinese mobile phone makers, largely relying on their strong sales channels and aggressive price cuts, even gained more than their foreign counterparts.

But now things are changing.

"Mobile phones are no longer a luxury. They have become a common communications commodity," Wang said.

"The cellphone market, like the consumer electronics market, is now characterized by small profits with large sales."

As a result, small firms are not faring well as they cannot dilute costs without large-scale production.

But bigger firms are also having a tough time.

Domestic cellphone makers Ningbo Bird, TCL, Amoi and Capitel have seen sales drop in the past few months largely due to stiff price wars and intensifying foreign competition.

TCL last week said it expected a loss for its current fiscal year while Bird said sales this year may be 30 percent less than what it had forecast.

"Price wars between the local players are so intense that almost everyone, eventually, gets hurt," said an executive with Matsushita's mobile phone division in China.

Matsushita is the manufacturer of Panasonic-branded products.

Elaine Su, an analyst with research firm GFK Asia, estimated Chinese local makers now have about 40 percent combined share of the mobile phone market, in terms of unit sales.

In terms of revenue, however, the share is much lower.

"Foreign giants such as Motorola have seen their share of sales revenue growing significantly," Su said.

The market for mobile phones sold for more than 3,000 yuan (US$361) is almost monopolized by foreign brands, analyst said.

Almost all mobile phones made by TCL, for example, are sold for less than 2,000 yuan (US$241), she added.

Chinese mobile phone firms traditionally enjoy significant advantages in the low-end market, Wang noted.

"But now many foreign firms are also aggressively attacking the low-end market, applying unprecedented pressure on domestic players," he said.

"For small firms like Emol, which has a short history in the mobile phone industry and lack capital, the pressure is even bigger."

According to CCID Consulting, a total of 252 mobile phone models were launched in the first half of this year.

And more than 80 percent of the new models were targeting the low-end market, at a price of less than 3,000 yuan.

"The low-end market is overcrowded and small firms can hardly make a big profit," Su said.

Kan Kaili, a professor with Beijing University of Posts and Telecommunications, blamed domestic makers' sputtering sales on the slow growth of China Unicom's CDMA business and the rapid up-take of the limited mobility service Xiaolingtong.

"The domestic mobile phone industry is now largely bolstered by the subscription of low-income users as the mobile phone penetration in large cities is already high," Kan said.

Many consumers have opted to subscribe to the cheaper Xiaolingtong service instead of China Mobile and China Unicom's cellular services since last year, the professor said.

According to Jasper Li, a senior official with UTStarcom China, the major provider of Xiaolingtong equipment and phones, the number of Xiaolingtong users in China doubled last year, reaching 40 million.

Li expected the number to hit 70 million by the end of this year, and 100 million by 2005.

In contrast, there were only 59.97 million new mobile phone users in the first eleven months of this year.

Su expected several small mobile phone firms would be squeezed out of the market next year due to the stiff competition.

"It's natural for firms like Emol, which have no manufacturing licenses and lack capital, to retreat," she said.

"Many OEM makers are already on the brink of collapse."

Besides fierce competition, the government's rigid mobile phone manufacturing scheme should be blamed for the plight of Emol, Wang said.

Leasing licenses accounts for a huge percentage of Emol's costs, he noted.

Industry insiders said licensed manufacturers can make about 60 yuan (US$7.23) from each mobile phone by lending licenses to other firms.

"This affects unlicensed firms' risk control capacities," he said.

Regulators have seldom handed out mobile phone manufacturing licenses in the hope of a tighter control for the industry.

Some licensed firms previously could make 1-3 billion yuan (US$120-360 million) a year by simply lending licenses during the boom times of the mobile phone industry, insiders said.

Calls have been growing to urge regulators to relax the mobile phone licensing schemes.

The Law on Administrative Licensing, which took effect on July 1, was also meant to abolish unnecessary and unreasonable administrative licensing items.

In October, Aux Group, a private firm, took the Ministry of Information Industry (MII) to court for allegedly violating the law.

Aux claimed the MII still held a tight grip onto the right to issue mobile phone manufacturing licenses, while the Administrative Licensing Law stated the government has no longer the right to issue the licenses.

Before the lawsuit, Aux had applied for the licenses but failed.

Later MII said the National Development and Reform Commission is now in charge of the mobile phone manufacturing licensing issue and Aux dropped the lawsuit.

Wang said there is a long way to go before the government abolishes the licensing scheme.

"Firms like Emol will remain unable to secure the licenses to cut production costs and enhance their competitive edge," he said.

Despite the gloomy prospects, domestic makers still have a chance to gain lost market share from foreign players, industry experts said.

"The shipment growth of Chinese mobile phone makers in the first nine months was eclipsed by the whole global market," said Xie Linzhen, vice-president of China Mobile Communication Association, "but I remain optimistic about the prospects of local players."

Xie made the remarks at a small forum last week hosted by Guangming Daily and the National Telecom Economic Commission under MII.

Xie blamed the descent of local makers on their slow catching-up of the latest market trends, like colour screens and cameras.

"Chinese makers have made great progress in terms of design capabilities and research and development (R&D), in relation to operating systems, chips and components," Xie said.

"That was unimaginable two or three years ago. It is still very likely that domestic makers could regain market share by significantly improve their core technologies."

(Business Weekly December 29, 2004)