Handsets with Chinese characteristics

From the TV to the PC domestic vendors have eventually overhauled foreign manufacturers in China. Could the same happen in the Chinese handset market?

Foreign mobile phone makers once had the immense Chinese market at their mercy. Not any more. The Ministry of Information Industry in mid-March

Many Chinese believe this will continue. Domestic manufacturing capacity is expected to rocket to 250m units in 2003 from 170m - Bird alone has ramped up by 20m. Meanwhile the MII has upped its target for local makers' market share from 50 per cent to 80 per cent by 2005. Even though consolidation appears inevitable, aspiring vendors are lobbying hard for new manufacturing licences.

Considering that established handset makers see China as the bright spot in an otherwise gloomy global outlook, this could have serious consequences for their businesses. "China is absolutely crucial," argues Ben Wood, senior analyst at Gartner. "Companies like Nokia and Motorola trying to hold market share absolutely need volume, and volume can be driven from China".

The threat may be overstated, however. The MII's numbers are for production figures, not domestic retail sales, so they don't necessarily reflect reality. As Craig Watts, an analyst with Beijing-based Norson Consulting, explains: "You have some companies producing like crazy but they have phones in the warehouse going nowhere". Excess inventory is becoming a 6-7 week issue for some local vendors, much more serious than for established manufacturers.

Norson's market share numbers (see chart below) back Motorola (30 per cent) and Nokia (23 per cent) far more strongly than the MII (26 per cent and 18 per cent respectively) while allowing domestic vendors around 30 per cent in total. Deutsche Bank is even less impressed: "I would say the proper figure would be 20-25 per cent at the end of 2002", says DB analyst Fung Ee Lim. Still, domestic makers are competing particularly effectively on three fronts; choice, design, and distribution.

Chinese consumers have more handset choices than ever. Reference platforms have become more available and cheaper. Chinese manufacturers have taken advantage and flooded the market. 250 new models hit the stores in 2002, most of them from domestic vendors. In January and February 55 new models came out, again the vast majority from local players like Panda and TCL.

Constant novelty appeals to Chinese consumers, according to Craig Watts.

People watch new phones coming out like cars coming out in the 50s in the US. It is a constant topic of conversation. Naturally, domestic vendors are in a better position than foreigners to listen to those conversations and act accordingly.

Watts says that means looking East for inspiration when it comes to design.

The designs are coming from Korea and Taiwan. Motorola and Nokia designs are coming from Europe and the US in most cases and they are missing the fashion taste in Asia. Nokia still doesn't have a clamshell phone.

However, it does have brand equity, particularly in the replacement markets of the more advanced, tech-savvy cities. It is worth noting that all the MMS handsets released so far in China are from foreign brands.

Whether you go for a domestic or a foreign brand may well depend on where you live and what market segment you fall into, and domestic vendors have successfully targeted outlying regions and second or third tier cities where the brand 'pull' of established vendors arguably holds less sway.

Which is why distribution is absolutely critical to success in China.

This is where local vendors enjoy the greatest advantage as many already have a distribution network in place as part of their existing home appliances/electronics/telecoms backgrounds. Local knowledge, guanxi, and points of presence all play a part in this 'push' model the domestic makers have adopted.

The jury is out on whether Chinese consumers will respond to 'pull' or 'push' selling strategies. In their haste to regularly churn out new models, domestic players are encountering quality problems that consumers are beginning to notice. Relying so heavily on foreign R&D and components will probably catch up with them - Deutsche Bank wryly notes that perhaps it is more appropriate to say that Korea and Taiwan have 25 per cent of the market.

On the other hand, the MII's statement of intent is impossible to ignore, although consolidation will be necessary well before local vendors can mount a serious challenge to the established foreign giants.Pie chart.eps