China’s handset blues
Production is rising, but new entrants pose definite threats
If you buy a handset today, chances are the model, be it Nokia, Motorola, Samsung or uncanny names like Bird or Gionee, is made in China. In 2007, China produced nearly 550 million handsets, about 45 percent of world total, of which over 400 million were sold outside of China. Mobile handset production is expected to rise again this year by about 10-15 percent.
Mobile handsets are a big business. There are 115 companies competing in all categories, from strip-down low-end models to “Blackberry”-like smart phones, with price in hundreds of dollars apart. Anytime you walk into an electronic store or handset retail outlet, the number of models on display can make your head spin, and people use handsets in different shapes and sounds. The chief reason for a booming handset market in China is handset is sold separate from service plans, so that customers first choose the model they like before signing up for the service; in the West, mobile handsets are virtually free with purchase of wireless service plan, but the supply of brands and models are usually limited.
After a decade of explosive growth, the handset industry is showing signs of maturity as competition has wrung out fat margins that made handset production one of the most profitable in the country. In the meantime, the market is increasingly controlled by a handful of companies. For example, Nokia’s market share has risen from 33 percent in 2006 to 38 percent in June; Samsung also sees its share rising steadily thanks in part to its ingenuity in form design, while Motorola’s share has plummeted from 22 percent in 2006 to a meager 7 percent this year. As a whole, foreign brands account for nearly 80 percent of handset exports that eventually are sold by companies like AT&T, Verizon, Vodafone and Telefonica.
A rollercoaster ride
Although the Chinese companies outnumber foreign counterparts by nearly 20 to one, their market share is significantly smaller. According to a recent survey, 80 percent of handset sales are dominated by leading brands like Nokia, Samsung, LG and Motorola, while all the Chinese companies are wrestling for sales in a narrow space. Market share is the “holy grail” for Chinese companies; their aggregate share reached a peak of 55 percent in 2003 after competitive pricing and a strong push into secondary markets. However, the success did not last long; their share has gone downhill since 2004 along with heavy casualties.
Bird, once a leader during the handset heyday, has suffered severe loss in the past three years and outlook for the rest of 2008 remains bleak. The Zhejiang-based company says handset sales plunged nearly 40 percent by June and export cut by nearly half after its decision to cut ties with Sagem Mobiles to save money. Amoi, another household name in China, reports a 24 percent decline in handset sales by June while gross margins fell below 4 percent. Disappointing sales and heavy losses became the mantra for most of 2007.
To contain the bleeding, most companies take the route of selling off non-essential assets or even shutting down handset operations. In addition to selling off its stake with Sagem, Bird has closed a software company and nearly 30 sales subsidiaries across the country. Lenovo and Skyworth have gone to the extreme by withdrawal from handset business altogether and returned to their core business: PCs and consumer electronics.
There are bright spots, though. TCL says handset shipment jumped 60 percent by June from year-over-year and sales grew 13 percent, and overseas sales at Konka rose nearly 40 percent. The biggest winner is ZTE. The Shenzhen-based company reports handset sales rose nearly 20 percent by mid-2008; most of increase was attributed by strong boom in overseas sales. ZTE is the largest handset exporter among the Chinese companies; it sold 31 million handsets in 2007, and nearly 70 percent to overseas markets. Handset sales contributed to 22 percent of total revenue last year. ZTE has also achieved the unthinkable by maintaining profit margin at 22 percent, highest in the industry.
While data show foreign companies dominate in both high-end and low-end segments, their position is also being eroded by the number of Chinese competitors and foray from a hodgepodge of counterfeit, smuggling and imitation products (think guerrilla warfare). Among them, Motorola seems to have lost momentum in design, time to market and effective marketing. Sony Ericsson has also seen its share fall from 6th in 2006 to 10th last year. Even Nokia cannot escape market chills. The largest handset maker says sales in the Greater China region (China, Taiwan and Hong Kong) fell 16 percent in the second quarter, the largest decline ever, and warns its market share may drop in the third quarter elsewhere. The main culprit for the fall is many handset distributors are reluctant to sell Nokia products because of low incentives which are typically around 2 percent for distributors and 5-7 percent for resellers, compared to 10% by average foreign companies and over 20 percent by Chinese companies.
Will the situation improve? It’s hard to tell. In July, the total number of cellphone users passed 600 million. While growth remains robust (8.7 million new users per month), the pace will likely slow down as penetration in many cities is close to saturation and nationwide penetration is fast approaching 50 percent. On the other hand, mobile handsets become attractive for many low-income people as prices continue to drop.
New sales will also come from demand for replacement or lure of new designs, which is estimated at 60-80 million a year. Another thrust will come from 3G which will open up a new market of at least 120 million users that will help boost handset sales to a new plateau. In the short run, however, many Chinese handset makers may not live long to their fortune; they not only have to withstand relentless onslaught by heavyweight players and underground nibbling by counterfeit products, but new threats from Apple, Google or even Microsoft. The future of Chinese handset market remains bright, but it is increasingly going back to the basic principle: survival of the fittest.