Handset industry to face tough challenges in 2004
By Yan Xianpu (China Business Weekly)
Updated: 2004-03-15 15:32

[The author is a senior economist with the National Bureau of Statistics]

China's mobile phone industry will continue its stellar performance this year, with total investment in manufacturing expected to increase by 20 per cent.

However, the industry will face tougher challenges that both economists and industry insiders have warned will surface in the future. These will come in a number of areas:

* Technology

Although mobile phone production has been industrialized for years, consumers still consider mobile phones high-tech products. In China, several domestic mobile phone manufacturers have emerged, and their capacity and output has been up to industrialized-scaled manufacturing.

However, many domestic manufacturers are producing OEM (original equipment manufacturing) for foreign brands, and only a few foreign manufacturers still control the core technology. So, it is understandable that consumers prefer the technology owners when they choose the brands.

* CDMA vs PAS

CDMA (code division multiple access) mobile phone manufacturers are shouldering greater pressure in the market. China Unicom has increased its subscribers up to 13 million. However, during the second half of 2003, new subscriber numbers increased slowly due to various reasons, and the increase in 2004 will not have a breakthrough on the base of 2003.

Therefore, CDMA manufacturers are shouldering an even greater pressure from the market. Meanwhile, PAS (personal access phone system) products, are growing quickly in popularity and challenging the development of the mobile phone industry. The low price of the handset, one-way charging, and fixed-line phone charge rates have attracted low-income consumers. Thus, the PAS market will continue challenging the market for mobile telecoms products.

* Brand competition

Though domestic mobile phone brands have improved greatly in output, export capacity and domestic sales volume, domestic manufacturers still don't have advantages either in technology or brands, but are exclusively following the market. Restricted in the areas of design and market promotion, domestic manufacturers depend largely on sales channels to compete. Therefore, they have lost the active position in market competition. No wonder they are in a bad position in terms of brand competition.

A Chinese worker conducts tests on mobile phones at the Ningbo Bird Co. Ltd production line in the eastern port city Ningbo. China's Bird, the country's top cell phone maker, aims to hike sales by two-thirds to 20 million handsets in 2004, quadrupling exports to $200 million as it attacks overseas markets, a senior executive said. [Reuters]

* Price competition

Price competition appears to be heavily superheating. In order to maintain a larger market share, manufacturers are enlarging capacity and output while lowering prices to compete with other opponents. From 2003 sales figures, it has been shown that the average price during the second quarter of 2003 was at about 1,500 yuan (US$181), which decreased about 15 per cent compared with that of the first quarter of 2003. The prices of middle- and high-end GSM (global system of mobile communications) mobile phones have dropped as well. Manufacturers have had to lower prices, and the advertisement of new products will be the main method to enlarge market shares. Thus, in 2004, mobile phone ventures will face challenges in terms of price.

Under severe market competition, domestic mobile phone manufacturers are being forced to give up the method of merely depending on market promotion, but in fact must now construct their core technology platforms.

The great changes in China's mobile phone market will definitely exist in the areas of technology, price and sales networks. The competition in all these stages will streamline the whole industry.

Facing such challenges, some enterprises without a good base of technology will lose out. But those that have anticipated changes will surge ahead in 2004.

Last year's performance

Last year was a busy year for the mobile phone industry, with the following highlights:

* Rapid development of the scale of the mobile phone industry

In 2003, mobile phone production and sales reached 158 million and 151 million, with growth rates of 48 per cent and 49.2 per cent respectively.

By the end of November 2003, the number of mobile phone users in China had reached over 260 million, exceeding that of fixed phone users for the first time.

* Considerable profits for mobile phone producers

Although the prices of mobile phones dropped dramatically last year, the average profit return rate in the industry remained at around 20 per cent. During the first 11 months of last year, sales volume for Chinese mobile phone ventures reached 209 billion yuan (US$25.2 billion), with profits reaching 10.2 billion yuan (US$1.2 billion).

* Good balance between production and sales

It is estimated that the storage of mobile phones in China is less than 10 million, only accounting for 5 per cent of the amount sold. This proportion has remained healthy, indicating the co-ordination between production and sales.

* Further development in the world market

Major domestic mobile phone producers are continually strengthening their engagement in the world market to support exports. According to statistics from the General Administration of Customs, in the first 11 months of 2003, China's mobile phone exports reached 83.43 million yuan (US$10 million), accounting for 54.8 per cent of sales.

* Undergoing reshuffling in the market structure

After intense competition over the last several years, the market share for the enterprises has already changed a lot. Market shares for foreign mobile phone producers are on the decline, with the rapid development of the domestic producers. The combined market shares for Motorola, Nokia, Siemens and Ericsson dropped from 84 per cent in 1999 to 24 per cent in 2003.

* Increasing market shares for domestic GSM mobile phone producers

The market share for domestic mobile phone producers has increased from zero five years ago to more than half now. Bird, TCL and Konka have all ranked in the top 10 in terms of production and sales, and occupied 31.6 per cent in the whole market. Domestic telecommunications products have won the approval of the market and consumers with their distinctive advantages, such as high function/price ratio, personal design and rapid renewal.

* Strengthened R&D capacity of domestic mobile phone producers

Many domestic producers have made great progress in technology, which enabled them to produce new style mobile phones with better quality and design to satisfy the demand of Chinese consumers.

For example, more than 80 per cent of new-style mobile phones were produced by domestic enterprises in 2003.

From the perspective of consumers, the purchasing patterns of mobile phones are showing the following features:

* Different from other electrical appliances, the cycle of mobile phone is much shorter because the consumers are always chasing after new products with more functions, better design and more reliable quality.

* The inflow of mobile phones from Japan and the Republic of Korea has changed the aesthetic standard of Chinese consumers, making foldaway mobile phones more and more popular. The design of Nokia mobile phones is monotonous, and might hamper its further development.

* The higher the consumer's income is, the more likely they would change their mobile phone in the future. No less than 100 per cent of consumers surveyed with income of over 10,000 yuan (US$1,206) per month are considering changing mobile phones. This high-income group is more inclined to purchase world-famous brands, such as Samsung, Motorola and Nokia.

* Different age groups have different preferences for mobile phone brands.

Generally speaking, with the increase of age, Motorola is more widely accepted, while Samsung is on the contrary. Nokia is most popular in the youth range from 16 to 24. Nokia and Motorola are popular among middle-aged consumers aged 45 to 60. Domestic products have a market share of 19 per cent among the people from 25 to 44, but only 5 per cent among those from 45 to 60.

* Men and women also have different tastes when purchasing mobile phones. Men prefer Motorola and Bird, while women prefer TCL. Nokia and Samsung are roughly same for both sexes.

Generally speaking, foreign brands are on top. Nokia, Motorola and Samsung are in the top three. Samsung has emerged later and become popular among youth, surpassing Motorola and Nokia in several areas including ranking first in future purchase potential. Bird, TCL and Xiaxin rank themselves in top 10 in all items.

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