In 2005, handset demand is expected to spill over to less penetrated countries, with heavier growth in Latin America, Eastern Europe, and Africa. Replacement demand is anticipated to continue its upward spiral as US and European operators bundle services with color display handsets and camera phones. As a result, the global mobile phone market is expected to reach 660 million units in 2005, posting a slowed increase of 6.8% from 2004.

In 2005, chip solution providers will roll out open architectures and integrated chips, thereby reducing production cost and lowering design and production thresholds to cut down time to market. Additionally, the push for standard interfaces such as MIPI (Mobile Industry Processor Interface), MVI (Mobile Video Interface), and MDDI (Mobile Display Digital Interface) will continue in 2005. Coupled with open operating systems, mobile phones' capabilities to integrate multimedia functionality will be highly enhanced.

While emerging markets are considered promising avenues to realize the prospect of two billion mobile subscribers worldwide, mature markets such as Japan, Korea, the US, and Europe are moving toward mobile multimedia services. The mobile communications industry is therefore increasingly polarized and diversified, creating increasingly minute market segments filled by camera phones, Smartphones, camcorder phones, and video phones.

In response to the slowing-down in the global mobile phone market, brand-name vendors will adjust strategies to maintain and boost profits. Depending on regional markets characteristics and the level of customization required for operators, brand-name vendors will either launch a barrage of handsets or finely targeted models in 2005. As price competition becomes white-hot, vendors will continue to migrate an increasing share of production to low-cost production bases. East Asia has thus become a production powerhouse, accounting for 80% of global handset shipments.

Brand-name vendors will build modularized platforms for better reuse and flexibility to attain economies of scale in production and procurement, increase design flexibility, and accelerate market response. To achieve product differentiation, they are looking to enlist cooperation from a variety of software providers. They will also accommodate diversified consumer demand by adopting custom MMI (Man-Machine Interface)/Application software and mechanical designs.

As 2G/2.5G devices are moving toward standardized specifications and interfaces, time to market and the speed of response to consumer demand will be key to forging a competitive edge. As brand-name vendors are aggressively driving down costs and shortening time to market, the trend of vertical disaggregation in the mobile phone supply chain will intensify.

Brand-name vendors will apply flexible outsourcing strategies toward production in line with their R&D activities. High-end and mid-range models will be designed in-house while their production will be outsourced to EMS (Electronic Manufacturing Service) providers, who have stronger competencies in procurement, manufacturing, and global logistics. Value-line and ultra value-line models will be outsourced to ODMs (Original Design Manufacturer), which maintain R&D and production advantages. To fill in the gap in product lines, mid-range and high-end models will be outsourced to ODMs or design houses.

In 2005, brand-name players will likely continue to conduct more R&D activities in-house, while EMS providers and design houses compete for orders. This double-sided pressure is likely to put the high-performing Taiwanese mobile phone industry on low gear. As a result, Taiwanese handset shipments are expected to reach 63.6 million units, registering a meager increase of 21.6% from 2004.