- Driven by output from domestic makers, mobile phone shipments in China are expected to grow by 22% compared to 2001, reaching 106.3 million units by the end of 2002, according to Market Intelligence Center (MIC), a Taiwan-based IT industry intelligence and consultancy house.

As price wars shrink profit margins in consumer electronics and growth tapers off in the Chinese PC market, domestic makers from these sectors have been rushing into the mobile phone production. Combined with more refined development strategies that have closed the gap in production scale and technology with international brand-name makers, Chinese mobile phone makers are quickly gaining on their counterparts from abroad.

By the end of 2002, Chinese makers will account for 20.7% of shipments in China, compared to 16.2% in 2001. Taiwanese makers' shipment share will increase from 4.6% to 6.4% during the same period, while the proportion held by international brand-name makers will drop approximately 6%.

"Many Chinese firms are planning to expand their domestic mobile phone market penetration rate while government sales quotas are still in place," said Sean Kao, Industry Analyst with MIC. The domestic industry is also the recipient of cultivation from the Chinese government in the form of income and value-added tax breaks, R&D investment, and assistance with going public. Accession to the WTO will eventually lift restrictions on production licenses and sales controls. "However, the Chinese government intends to implement strict regulations governing after-sales service guarantees, handset radiation emissions standards, and the establishment of new handset plants," added Kao. "Such measures will likely slow down foreign firms and protect domestic Chinese companies in the short term."

However, with lessening government protection on the horizon, domestic makers will become heavily reliant on developing the domestic market by leveraging the competitive advantages in branding and distribution gained through their PC and consumer electronics businesses. "Many makers have already won consumer confidence in other IT product sectors. Combined with a high price-performance ratio, Chinese consumers should become increasingly accepting of Chinese-made mobile phones," Kao said."

It is expected that domestic makers will concentrate on mid-range phones due to the prohibitive production costs of high-end models and the dominance of international brand-name makers in the value-line market. Mid-range models also allow retailers to preserve a certain degree of profit margins. Additionally, given the high market penetration of international makers in large cities, Chinese makers will likely concentrate on small to medium-sized cities. Not only are international makers avoiding these markets in the short term, but Chinese firms already have a strong logistical infrastructure within these areas.

In the second quarter of 2002, domestic maker TCL had the fifth highest shipments of any maker in China, up from sixth in the previous quarter and ninth in 2001. International brand-name makers Alcatel and Ericsson saw a steep decline in shipment volume, while production from Motorola's Tianjin plant was a second contributor to the thrust behind second quarter growth of the Chinese mobile phone industry. Total shipment volume increased to 28.5 million units in the second quarter, up 35.7% from the first quarter of 2002. Nokia remained the largest producer overall.

Looking ahead to 2003 and beyond, Kao stated that much of the growth up to now is a result of movement of production to China by international brand-name makers. "However, as the current wave of mobile phone production relations among international makers comes to an end, the Chinese mobile phone industry is expected to gradually settle into a patter of steady growth, rather growing by the leaps and bounds seen from 1999 to 2002," said Kao.