Abstract
Now that China much-anticipated WTO entry has finally become a reality, existing players and new entrants in the Chinese mobile phone industry are responding with great enthusiasm. American and European players are competing to increase production scale and are effecting the creation of mobile phone industry clusters to better support their activities. Korean firms are catching up for time lost during China restrictions on entry, investing in manufacturing facilities and ramping up production in a hurry. Chinese vendors are also striving to gain a firmer foothold in a market that is rife with competition.
On the other side of the Taiwan Strait, Taiwanese makers continued to develop their ODM partnerships with leading international vendors. First tier makers dominated the Taiwanese mobile phone industry in the first quarter of 2002. While some players experienced a large-scale increase in shipment volume, the growth of other companies was restricted by their inability to gain product approval from their ODM clients.
In this report, MIC will examine the strategies of the industry leading players in China, as well as how Taiwanese companies are leveraging know-how from the information technology industry to lift themselves up to the worldwide stage in the mobile phone industry.
The overall Chinese handset industry development in the first quarter of 2002 following China WTO entry indicates that the Chinese government is likely to gradually liberalize the granting of handset production licenses in deference to WTO rules. It will also promote further foreign investment, which will lessen domestic unemployment pressure and reduce import dependence. However, leading international handset players planning for large-scale penetration of the Chinese market should expect some short-term policy ambiguities and even administrative interference.
Over the past three years, the share of production accounted for by Northern China has slid with the opening of a succession of new plants in Eastern China. MIC believes the future will witness a reverse trend with the completion of Nokia Beijing StarNet Park and the expansion of production capacity by Japanese firms in Beijing. As a result, the north-south split in handset production bases in China will persist. However, the extreme weather conditions and the worsening sand storms in Northern China pose a great challenge to the production activities of the two handset giants in the north, Nokia and Motorola. Taiwanese handset makers?migration to Northern China and Flextronics development of its Zhuhai plant bear watching.
It is expected that the production scale competition between Beijing Nokia and Tianjin Motorola will stimulate further development of industry clusters in the Chinese mobile handset industry. The formal entry of Korean manufacturers into the Chinese market will have a significant impact on market competition in China. The business strategies of Korean firms in China will decide the fate of the Chinese vendors that currently depend on them. The business strategies of Japanese companies, Taiwanese firms, and CEMs, which are all poised for large-scale expansion in China, are at this point unclear.
While 3G technology remains immature, GSM/GPRS mobile phones will be the mainstream products; thus, Taiwanese makers have managed to become involved in the production of GSM/GPRS units at a critical juncture. In addition, as leading brand-name vendors outsource an increasing percentage of production, they are counting on Taiwanese ODMs to create to new designs and control costs. All of the top five leading mobile phone vendors, with the exception of Nokia and Samsung who manufacture their own products, have cooperative relationships with Taiwanese players, and have helped these makers enter the worldwide mobile phone market. With Nokia low revenues and net profits in the first quarter of 2002, MIC expects the company will invest a large amount of resources in high-end GPRS and 3G development, thereby becoming a world leader in communications technology. Nokia would then outsource value line GSM mobile phones to Taiwanese makers to lower their production costs.
As first and second tier Taiwanese makers have increased their own design capabilities, they have gradually established their own hardware solutions platform systems; numerous players thus possess ODM capability. In addition, with their existing information technology industry management experience and ability to lower costs, Taiwanese CEMs (Contract Electronics Manufacturer) boast superior advantages in pure OEM business. With Motorola and Ericsson releasing mobile phone platform technology, the resultant lowering of technological entry barriers will attract even more new Taiwanese entrants.
As far as the Taiwanese mobile phone component supply chain is concerned, peripheral components such as phone casings, PCBs, keypads, antennae, microphones, speakers, and connectors, which account for 30% of material costs, will continue to see a steady supply from Taiwan highly developed information technology industry. Taiwanese makers?widespread entry into the wireless microwave communications industry between 1999 and 2000 with GaAs and SAW (Surface Acoustic Wave) filters should also assist in the future supply of PA and RF-IC components, which account for another 30% of material cost. Finally, as for baseband ICs, which account for the remaining 40% of material costs, Taiwanese IC design companies Mediatek and VIA have been engaging in baseband solution design. Taiwanese mobile phone companies will thus be able to purchase less expensive solution platforms and technological support. Overall, a vertically integrated supply chain is already gradually taking shape in the Taiwanese mobile phone industry. If the industry imitates the high degree of division of labor long evident in the Taiwanese information technology industry, Taiwan will play an even more important role in the mobile phone market in the future.