After two to three years of rapid expansion in the domestic market, Chinese handset makers began to encounter mounting challenges from international vendors in the third quarter, who underwent channel restructuring and adopted more flexible pricing and marketing strategies. In addition, projections for 2004 sales, revised upward in the first quarter, were over-optimistic. Key component and channel inventories piled up, further exacerbating a worsening price war in the Chinese market.

While the mobile phone industry was plagued by inventory problems and diminishing profitability, the Chinese government continued to tighten lending regulations and increased interest rates to cool the over-heated economy. Chinese handset makers thus met with financial difficulties.

In response, Chinese handset makers not only cancelled a significant number of orders for key components, but also delayed product rollouts. As a result, their third-quarter shipments from Chinese makers suffered a drastic drop. Added that seasonal effects failed to materialize in October national holidays, Chinese makers' shipment volume reached approximately 63.3 million units in the third quarter, a lackluster increase of 1.2% sequentially.

In the fourth quarter, Chinese mobile phone industry shipment volume is expected to see marked growth in December, once inventory pressure begins to ease off. However, due to limited growth in shipments in October and November, Chinese mobile phone industry volume is anticipated to climb 9.5% sequentially to approximately 69.4 million units in the fourth quarter. As evidenced by the Ministry of Information Industry instance on enforcing No. 5 Document, which heavily restricts mobile phone production, the Chinese market is unlikely to walk out of mire of over-competition any time soon.