Abstract

Focus on New Technology and Business Application Software

In the early days, the limited technical capabilities of Chinese handset design houses encouraged them to focus mainly on industrial design. However, as their capabilities improved, and as they began to develop the operator market, some design houses have expanded into the development of 3G and Wi-Fi/EDGE handsets, where the technical requirements are more demanding. With the rapid pace of change in mobile communications technology, both terminal product users and mobile operators have come to demand more in terms of multimedia, LBS (Location Based Services) and other data services. At the same time, profit margins in the medium- and value-line handset market are being squeezed as the competition in this segment grows more intense. To stand out, design houses need to distinguish themselves from the large number of design firms with limited technical capabilities. The leading design houses are now able to offer total solutions that incorporate chipset-based PCB layout design, ID/MD design and software application design, and they are concentrating their R&D efforts on ways to personalize handset functions and on business applications. The emphasis is now on Smartphone products, and on handsets with innovative new functions such as mobile positioning.

Customer Portfolios, Customers' Technological Capabilities Pose Threat to Future Growth

Chinese handset design houses emerged due to the leading Chinese handset vendors' lack of a comprehensive system design capability. Firms that did possess such a capability began to sell handset designs to the mobile phone vendors. Today, there are two main threats to the continued growth of the handset design house sector: the structure of design houses' customer portfolios, and the changes in these customers' technical capabilities.

Chinese handset design houses' customers are mainly Chinese mobile phone vendors, along with a few foreign vendors that have begun to outsource some of their handset design operations for strategic reasons. In 2004, the international vendors operating in China began to restructure their operations, and succeeded in clawing back market share from the Chinese vendors, which up to that point had been experiencing rapid sales growth. At the same time, design houses' solutions were eagerly adopted by channel players, which in general lack significant technological capabilities, and sales on the black market therefore rose. As a result, almost all of the Chinese mobile phone vendors saw their market share shrink in 2005; many of them found themselves in serious financial difficulties. From the design houses' point of view, the business opportunities presented by the channel players and the black market were not sufficient to compensate for the fall in orders from the leading Chinese vendors; overall, the market for the design houses' services was shrinking.

In the past, Chinese mobile phone vendors lacked both design and manufacturing capabilities, and were forced to rely on CKD/SKD handset kits supplied by Taiwanese and Korean manufacturers. Over time, as the Chinese vendors' manufacturing capabilities improved, they ceased to purchase CKD/SKD kits and only needed designs from Chinese system design houses; in most cases, the vendor now handled the manufacturing side in-house. If, in the future, the design capabilities of the Chinese handset vendors improve dramatically in the same way that their manufacturing capabilities have improved, they may no longer need the services of the design houses.

One strategy that the design houses could pursue is to build up their manufacturing capabilities and reposition themselves as ODM providers. However, this would bring them into direct competition with the Taiwanese ODMs, which possess first-rate production management capabilities and have built up impressive global logistics networks. The alternative is to expand upwards into the design of high-end products such as 3G handsets and Smartphones, but developing the technical capabilities needed to make this transition will be no easy task.