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“If enterprises only aim for scale and output, the result will be overloaded warehouse followed by price wars which will lead to deficits for all players in the industry. China’s mobile handset industry will be jeopardised.”
- Wang Bingke,
Associate Director, Department of Economic Reformation and
Economic Running, Ministry of Information Industry

According to the 2003 Electronic Information Industry Economic Statistic Report published by China’s Ministry of Information Industry (MII), China’s domestic handset enterprises continued to have an increased share in the domestic market in 2003. Output of domestic brand GSM1 handsets was 48.3 million while domestic sales was 47.329 million – a 54.7% market share and a 15.5 % increase from 2002. Three domestic brands – Bird, TCL, Konka were ranked among the top ten both in terms of industry output and sales. Bird, in particular, beat foreign competitors to become the industry leader in domestic sales.2 A report in Economic Daily showed that in 2003 the average profit margin of domestic handsets dropped to about 10%. Compared to the average 20% - 30% profit margin in the global handset industry, China’s domestic brands were paying astonishing prices in order to gain a larger market share.3

From the related reports, one can see that in 2003, behind the ostensible prosperity of domestic handsets laid a series of problems, which have begun to unveil in 2004. On one hand, average handset price has continued to drop due to increasing competitions in the market. Such competitions affect mostly domestic handset manufactures, while foreign brand handsets basically maintain a stable price. On the other hand, market share of domestic handset brands has been dropping, from 54% in December 2003 to 48.1% in June 2004.4

There are four major reasons leading to the current crisis for China’s domestic handset brands. First is the changed global market structure. As one of fastest growing economies in the world, China has become the largest market for handsets consumption; its position in the global handset market is getting more and more important. Major foreign handset brands regard China as the focus of their global strategies. Secondly, China’s handset market is opening up after China’s accession into World Trade Organisation (WTO). For foreign handset manufacturers, the entry barrier is lowered. As the deadline for commitment on opening up China’s handset market approaches, the policy shield for domestic handset brands will soon disappear. Thirdly, after many years of operations in China, some foreign handset manufacturers are now familiar with the market. Also, the standardization of distribution channels for domestic handsets weakens the advantages for domestic handset brands to gain market share. Finally, technological advancement in handsets is growing faster than before, thus the technological shortcomings of domestic manufacturers are inevitably exposed, as seen in their relatively slow updates, mainly in middle to low-end products.
1 Global System For Mobile
2 (Ministry of Information Industry)
3 ‘The End of the OEM Era’, The Economic Daily, April 20, 2004
4 ‘Fightbacks in The Handset Industry’, The Economic Observer, September 13, 2004
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