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Saturday Feature
Tough call
Feng Jianhua

          Five major domestic mobile phone manufacturers released disturbing financial reports for the third quarter in early November, in which four out of the five suffered serious losses.
The nation's biggest domestic player in this sector, Ningbo Bird Co., lost 280 million yuan ($34.52 million) during the first nine months, with a net loss of 180 million yuan ($22.19 million) in the third quarter alone. Meanwhile, it predicted a big loss for the 2005 financial year, compared with the net profit of 200 million yuan ($24.66 million) it posted in the same period the previous year.
TCL Communications Technology Holdings Ltd. reported a loss of 460 million Hong Kong dollars in the third quarter, while its deficit in the same period last year stood at 147 million Hong Kong dollars.
The bad news continued at Konka, which reported suffering a "wide-range" deficit in the third quarter, hampered by its handset business, leading to an almost 40 percent plunge in net profits.
Amoi reported a loss of 135 million yuan ($16.65 million) in the third quarter, and predicted continued losses in the fourth quarter and the whole year.
It's the first time that all four major domestic handset manufacturers have been in the red at the same time, causing much market agitation about their future.
Lucrative Market
The Chinese handset market continues to register a strong growth despite domestic producers' widespread losses.
According to statistics released on November 8 by CCID Consulting, a leading Chinese market research firm, some 20.97 million handsets were sold on the Chinese market during the third quarter, an increase of almost 16 percent over the same period last year. As the peak time of delivery approaches, annual sales are expected to exceed 88 million, compared with 73 million last year. The sales volume is expected to top 130 billion yuan ($16.03 billion).
Though the number of mobile phone subscribers in China currently stands at about 350 million, there are less than 30 mobile phones for every 100 Chinese, a smaller figure compared with some developed countries in the West. Experts say there is still huge potential for the development of China's mobile telecommunications market, especially in small and medium cities and the vast rural areas.
Eyeing China's strategic position in the telecommunications industry, the Global WiMAX Summit 2005 was held in China from November 10 to 11. Ronald Resnick, president of the summit, told the media that China's telecommunications industry is big in size, and the country will definitely become the center of the international market in the foreseeable future.
Based on this conclusion, global giants, such as Nokia and Motorola, have been increasing their input in China. In addition to production bases, they have also moved the research headquarters of their Asia Pacific operations to China and upped investment in research and development (R&D) by a large margin.
Ruey-Bin Kao, President of Motorola (China), said China is now the most important part of the company's global strategy, as well as its largest overseas market outside the United States. In 2004, Motorola generated a record revenue of 65.8 billion yuan ($8.11 billion).
Achilles Heel
Domestic producers are blaming the illegal handsets for their losses. Illegal handsets refer to those smuggled into China through southeast coastal areas, which mainly copy such renowned international models as Samsung and Sony Ericsson.
Illegal mobile phones are usually priced between 1,000 yuan ($123) and 2,000 yuan ($246). This slices a huge chunk of the market from domestic handset manufacturers. In mid-June, Bird, TCL and other domestic producers announced that illegal handsets have accounted for one third of the nation's total sales.
MII, in cooperation with several other ministries, has since waged a crackdown on illegal handsets. Le Yesheng, President of Skyworth Mobile, admitted that things are looking up and the infiltration of illegal handsets has decreased dramatically.
But industry insiders don't consider illegal handsets the main cause of domestic producers' dilemma. They said international producers would come off second best because domestic models mainly attract the low-end market. Moreover, Lenovo, also a domestic producer, has profited greatly from handset production as it focuses its strategy on brand influence. Its third-quarter financial report on November I said the company's sales of mobile phones jumped by 139 percent to 1.4 million.
Therefore, many experts believe the root reason lies in the lack of competitive edge and the wrong judgment of market trends.
Over recent years the handset market trend has been multi-functions, individuality and intelligence, turning mobile phones into terminals for phonic and visual communication, information storage, game and music playing.
These changes call for increased sophisticated technology in chips and software. But the core chips and software technologies, which account for 30-40 percent of production costs, are still monopolized by several international manufacturers, and domestic producers make few breakthroughs in these sectors. It's therefore hard for them to maintain their competitive edge.
Statistics show that Chinese manufacturers only held onto about 40 percent of the market last year, compared with 60 percent in 2003. And in the first five months of this year, the figure slipped to 34 percent.
Moreover, many foreign handset manufacturers are readjusting their strategies to exploit the cheaper side of the market by launching a series of budget models in China.
In March Motorola launched two lowend handsets, respectively priced at 398 yuan ($49. 1) and 498 yuan ($61.5).
Meanwhile, some domestic producers are optimistic about the market and busy with increasing production, losing the chance to develop more advanced products with multiple functions.
Taking the mobile phones with colour screens as an example. When colour-screen mobile phones emerged in 2003, some domestic producers believed it would be a big hit for years, purchasing large quantities of raw materials for production. But their research failed to follow up and some projects were delayed for up to 12 months. During this time, consumers' attention was shifted to newly developed phones with camera function. As the raw materials couldn't be returned to suppliers, some producers had to make old-fashioned colorscreen phones and sell them at a price lower than cost. This also attributed to the deficits of domestic producers.
Regaining Momentum
On October 29, four new companies, which had been granted approval to produce wireless phones, formed an alliance and vowed to regain the momentum of domestic handset producers. They said all parties would share resources in purchase, sales, after-sales service, production and R&D, to reduce costs and increase profit.
Their alliance is actually to meet the current challenge in the industry. As the shortage of raw materials emerges, suppliers neglect smaller producers to guarantee supply to the big players,
Analysts with Sino Market Research said the destiny of domestic producers is in their own hands. The success of Lenovo comes from its overall long-term strategy, and companies like Bird and TCL should follow suit to extricate itself from this difficult situation, said an analyst.
Though some believe the alliance is merely a smokescreen, others admit domestic producers must unite to compete with foreign counterparts.
Wong Cho Tung, President of SIM Technology Group, a Hong Kong-based wireless communications products maker, said the up- and downstream domestic companies should unite and aim at middle-end mobile phones, priced at 1,000-2,500 yuan ($123-308), to win market share.
Some industry insiders, including Wong, are still confident about the future of domestic producers. The industry is still full of hope, they said.
But the handset manufacturing industry will definitely be reshuffled with the launch of China's 3G (third generation) market. Latest news said the M11 is mulling over an exit mechanism and from next year the licenses of some producers with large inventories might be revoked.
So far China has about 60 domestic producers, which could be reduced by 50 percent in 2006, said an analyst with CCID.
In the eyes of Li Xiaozhong, General Manager of Amoi, the future of the handset market might revolve around only mainstream and tion-mainstrearn producers, instead of domestic and foreign manufacturers.

Beijing Review


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