Abstract

Chinese handset makers have already built up high market share in the Chinese domestic market. They have adopted strategies that are based on aggressive shipment growth and price competition; as a result, inventory pressure has increased and profit margins have fallen. In response to this situation, China's MII announced that the strategy for the development of the Chinese mobile phone industry in 2004 would emphasize exports. Those international vendors and second-tier Korean makers seeking to secure a share of the Chinese domestic market will thus find themselves required to export 60% of their output. Chinese makers will be looking for opportunities to acquire the mobile phone divisions of second-tier international vendors such as Philips and Alcatel to compensate for their own weak brands and lack of international marketing experience, so that they can start developing international markets as rapidly as possible.

Although China is now a member of the WTO (World Trade Organization), it has announced that it has no intention of abandoning the restrictions on handset production contained in "Document Number Five". Given that most of the leading international vendors have already secured production permits and domestic sales quotas, forming a consensus to put pressure on China over this issue will be no easy task. The less politically influential Korean and Taiwanese makers will be faced with a choice between procuring domestic sales quotas illegally, or establishing joint ventures with Chinese makers to gain access to the Chinese domestic market. Even those Chinese handset makers that are badly managed will still be able to create some value from their production permits and domestic sales quotas.

Numerous factors have conspired to rapidly shift the opportunities that Taiwanese and Korean players enjoyed from knocked-down kits to components suppliers and mobile phone design houses. The Chinese government has implemented stricter import restrictions on knocked-down kit imports. A higher division of labor has formed through the involvement of total solution suppliers, mobile phone design houses, and EMS (Electronics Manufacturing Service) providers. Additionally, Chinese makers are aggressively reassuming authority over component procurement to cut production costs.

In response, besides focusing more on the provision of high-end handsets, Korean and Taiwanese makers will also need to think carefully about establishing their own brands. As for the component suppliers, given that the R&D capabilities of the Chinese handset makers remain low, component makers will need to be able to provide highly integrated modules and technical support if they are to secure orders from China.

Appendix

Research Scope

This report covers major companies manufacturing mobile phones in China for the domestic market or export, including output from domestic makers, foreign direct invested entities, and joint ventures. Handset statistics include GSM, GPRS, CDMA, Smartphone, and PAS phones, where full system assembly is completed in China.

Definitions

Assembly Levels

Full System

Handsets that contain all components mounted on PCB as well as complete assembly of peripheral components. Ready for immediate use after shipment to the customer.

SKD

PCB-mounted components and several other major components, such as battery and cover, are shipped disassembled to customer. The customer performs simple final assembly.

CKD

Components are shipped to customer. Customer performs surface mount and final assembly.

Glossary of Terms