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Cover Story: Chinese Mobile Phone Makers Eye Global Market

The mobile phone market in China is approaching 100 million units a year in sales; Chinese manufacturers are steadily increasing their share of the market, and developing more high-end models.

China has been positioned as one of the most critical markets by leading mobile phone manufacturers around the world. Impressively, a Chinese manufacturer - Ningbo Bird Co, Ltd of China - recently soared above what are often considered the top two firms, Nokia Corp of Finland and Motorola, Inc of the US, to take the top share in sales volume for the first half of 2003 (January to June). Another Chinese firm, TCL Mobile Communication Co, Ltd of China, jumped up to third place. Total share for all Chinese manufacturers hit 55.3% by sales volume (Fig 1), taking the larger share of the market for the first time.

Next Target: Overseas

Chinese firms have been working hard to win market share, and now they are working to assure continued growth in the future. They are moving into high-end designs, offering functions such as cameras, and launching basic R&D into third-generation (3G) mobile phone technology.

Camera-equipped mobile phones have been released by China Kejian Co, Ltd of China, the Legend Group Ltd of China, Qingdao Hisense Communications Co, Ltd of China and other healthy mid-sized firms. As Liu Yunlong of China Kejian explained, "Commercializing camera-equipped phones will boost our technical capabilities and advertise our brand name at the same time." Qingdao Hisense began selling its C3698 camera-equipped model in May 2003. Recently, models have appeared offering

MPEG-4 video capture, MP3 player and Global Positioning System (GPS) receiver functions. China Kejian's Liu added, "We'll complete our 3G mobile phone prototype in early 2004." Qingdao Hisense is also advancing R&D into both wideband code division multiple access (W-CDMA) and CDMA2000 designs.

Chinese manufacturers are eager to enter the world market; not only top manufacturers like the Legend Group and TCL Mobile Communication, but even mid-sized firms are gearing up for action. A source at TCL Mobile Communication said, "Our mobile phones are on display in shops in Southeast Asia and South Asia, like Thailand and Bangladesh. And we are making steady progress in negotiations with agents in Russia, the UK, France, Germany, Greece and elsewhere." Qingdao Hisense is pursuing business in Southeast Asia, where CDMA communication service is becoming established. The Legend Group, a major PC manufacturer in China, is also hot, according to Jin Jian, Mobile Communication Lab Director, Legend Corp R&D: "We began to use the Lenovo brand name in early 2003 as part of a branding strategy designed with expansion into overseas markets in mind."


R&D Projects Farmed Out Most Chinese manufacturers have only been in the mobile phone market for two or three years (Table 1), but even so they are experiencing phenomenal growth in business scale. A company releasing 10 to 20 new models a year, with sales between the hundreds of thousands and the millions, is not unusual. TCL Mobile Communication, for example, established as the mobile phone arm of the TCL Group, sold a total of 2.92 million mobile phones in 18 different models in 2002. It released 16 models from January to October 2003, and as of the end of September that year had already shipped over 7.16 million units.

Qingdao Hisense began volume production only in October 2001, but sold over 400,000 units the following year. It shipped six models in 2003, and expects to sell over 1.2 million units. Plans for 2004 are for 11 models and 1.8 million units. While there are differences in corporate scale, this style of dynamic, newborn Chinese company is not at all uncommon.

So why have so many Chinese firms entered the market, and boosted market share so much? How can so many new models be developed so quickly, and released to the market so cheaply? Some industry observers claim that the broad sales networks covering China have contributed to this success, but that's not the only factor. Behind the Chinese manufacturers are two key resources, the first of which is the subcontractors to handle mobile phone development, design and manufacturing.

Help from Contractors

Contractors include the design houses handling development and design, and electronics manufacturing services (EMS) for actual manufacturing. When Chinese manufacturers first began to make terminals they had little technology or expertise in the manufacturing sector. These contractors were indispensable in filling the gap between the needs of the local market, created by leading foreign manufacturers, and the technical capabilities of Chinese manufacturers just entering the field.

One approach is to hire a design house to handle hardware design and communication protocol implementation, while taking care of the user interface software and case design in-house. Tie-ups with any of the large number of EMS firms in China will take care of manufacturing, making it possible to sell the result under the company's own name. Approaches like this have made it possible to productize 10 or 20 mobile phones in a very short period of time.

Until a few years ago, foreign-capital design houses were leaders in China, including firms like Bellwave Co, Ltd of Korea, Cellon Inc of the US and TTPCOM Ltd of the UK. Well-known EMS companies including Solectron Corp of the US and Flextronics International Ltd of Singapore were there, too. In recent years, however, sharp market growth and a rapid increase in the number of manufacturers has led to an increase in the number of Chinese design houses, many of which are developing solid capabilities.

One good example is the Techfaith group. This engineering firm has about 400 employees, almost all Chinese.

Fan Liming, CEO of STEP Technologies (Beijing) Co Ltd, a group company, expressed confidence: "We can handle any and all processes, from mobile phone development through manufacture. Not only hardware and software development, but also ramping up production lines and handling quality assurance."

Attracting Technology

The second key resource supporting the rapid development of Chinese manufacturers is the component manufacturing industry, which views China as a promising market. Its sheer scale has attracted the attention of component manufacturers in Japan, Korea, the US and Europe, each of which is in a rush to sell its own parts and technologies. If a local firm lacks product assembly capabilities, a components manufacturer is usually available to provide assistance. As a result, Chinese manufacturers can release mobile phones to the market featuring the latest technologies.

Renesas Technology Corp of Japan has begun supplying China with its SH-Mobile application processor for mobile phones. The first mobile phone from a Chinese manufacturer using the SH-Mobile will appear
in the first half of 2004. Seiko Epson Corp of Japan is also offering its microcontrollers for mid-range models.

Procurement, Development

Chinese manufacturers are also getting serious about the procurement of components at home. While many components were primarily procured through imports in the initial stages, the ratio of domestic procurement is steadily rising. The key goal is improved price competitiveness.


Click fig to enlarge
Of the components available in China, many come from manufacturing sites established by foreign-capital firms from Japan, the US or Korea. Mechanical parts like microphones, speakers, printed circuit boards and cases, however, are starting to be offered by wholly Chinese suppliers (Fig 2).

As more and more components come from China, efforts are also under way to improve design technology: design work formerly left up to design houses and component manufacturers is gradually being moved in-house as firms try to boost price competitiveness by adding value through unique functions, or by reducing royalties paid to design houses. At present, however, core components such as baseband processors and radio frequency (RF) processing ICs are imported, or manufactured locally by foreign-capital firms.

As Ikuya Kawasaki, department manager, SOC Design Dept 6, SOC Div, MCU & SOC Business Unit, Renesas Technology, pointed out, "Considering how fast they're growing, I wouldn't be at all surprised if the top group of Chinese manufacturers begins designing its own phones soon."

3G Ambitions Commercial service for 3G mobile phones is expected to start in China as early as the second half of 2004. The Chinese government is paying close attention to implementation timing, positioning 3G mobile phones as a prime target for local industry development plans.

Chinese manufacturers involved with infrastructural communications equipment are eagerly pushing ahead with 3G system development. The largest Chinese manufacturer for communication equipment, Huawei Technologies Co, Ltd of China, is commercializing a range of key products for the W-CDMA 3G mobile infrastructure, including basestations and radio network controllers (RNC).

China is also considering introducing a third standard, unlike W-CDMA or CDMA2000, called Time Division Synchronous CDMA (TDS-CDMA), apparently with hopes of nurturing domestic industry. Datang Telecom Technology Co, Ltd of China and other firms are developing infrastructural equipment for TDS-CDMA, and terminals are expected to be productized in the second half of 2004.

Chinese mobile phone carriers are also eager to begin 3G mobile service. One of the key reasons is that the capital investment required for the communications infrastructure is expected to be significantly less than that needed for Global System for Mobile Communication (GSM). They seem to be aware of advantages other than merely the increased diversity of high-speed services they can offer and the resulting potential for increased revenue.

Chinese mobile phone carriers are being forced to upgrade their infrastructure, such as through additional basestations, to meet user growth. Even though the number of subscribers is enormous, however, the average revenue per user (ARPU) is not very high; estimates are RMB120 to RMB130 (about 1,680yen to 1,820yen). Not surprisingly, mobile phone operators want to minimize the cost of basestations.

With 3G mobile phone technology, which achieves a high frequency utilization ratio, the user capacity can be significantly increased. Carriers believe that compared to the existing GSM approach, the new system could mean more users for the same capital investment.

Development of cheaper terminals is also a key priority. In September 2002, Huawei Technologies entered into a tie-up with Infineon Technologies AG of Germany to jointly develop an inexpensive

W-CDMA mobile phone. Their goal is to productize a design at the same price as a low-end GSM model. Prototyping is planned to be completed before the end of 2003, with market release in June 2004.

by Chikashi Horikiri

(March 2004 Issue, Nikkei Electronics Asia
http://neasia.nikkeibp.com/nea/200403/comnet_292680.html