Looming Glut

Domestic handset maker Ningbo Bird announced last month its annual production capacity had reached 20 million.

TCL quadrupled its capacity in October to 12 million handsets a year, compared with its previous capacity of about 3 million.

China Electronics Corporation Telecom (CECT) plans to increase its annual output to 5-6 million units.

Kejian and Konka also announced they are aiming for an annual capacity of 6 million units this year.

Analysts predict the combined annual production capacity of handset makers will reach 230 million units this year.

"The production overcapacity of the domestic mobile phone market is ballooning," Wang Guoping, an analyst with China Galaxy Securities, told Business Weekly.

Wang estimated there will be 50 million to 60 million new mobile subscribers in China this year.

About 50 million users are expected to replace their handsets, he said.

The combined number is a far cry from than the planned capacity.

According to the Ministry of Information Industry (MII), only 11 domestic makers sold more than 1 million handsets in the first 10 months of last year.

There are more than 20 domestic mobile phone makers with licences in the marketplace.

"The surprising boom of the handset market is enticing more players to jump into the sector, which is accentuating the production overcapacity," Xu Xiguang, vice-president of Ningbo Bird, told Business Weekly.

Many household appliance makers, such as Haier, and IT (information technology) players, such as Legend, have entered the handset market.

Rumours swirl that some DVD player makers, which do not have licences to produce mobile phones, have also entered the handset market.

Numerous companies are waiting for MII officials to grant licences so they can produce mobile phones.

South Korea's LG Electronics Ltd and Japan's Kyocera Corp are also planning significant capacity increases, UBS Warburg was quoted as saying.

Xu estimates 80 million handset units will be sold in China this year, while more than 5 million will be exported.

The lower-priced entrants are heating up the market competition, Xu said.

"The production overcapacity is clearly there," he said.

Guo Chang, an analyst with Beijing-based CCW Research, said mobile operators' generous handset subsidies will help increase the production overcapacity.

"China Mobile will very likely aggressively subsidize handsets this year to promote its GPRS (general packet radio system) services, following China Unicom," Guo told Business Weekly.

With handset subsidies, manufacturers are more willing to produce handsets even though their market prospects remain muddled, he added.

Price Wars

The production overcapacity is putting increasing price pressure on handset manufacturers, analysts noted.

"Price wars are unavoidable this year," Guo said.

"Domestic makers are seeking production capacity expansion, betting it will help them cut costs to better compete with their foreign counterparts."

While aggressive ad campaigns drove the rapid increase of domestic makers' market share in past years, they will resort this year to price cuts to increase their market stake, Guo said.

"The question is who will initiate the price wars," he added.

Some analysts expect TV makers, such as Panda and Hisense, or giant retailers, such as GOME and Suning, to get the ball rolling.

Yu Yang, president of Analysys Consulting, said Samsung's entry into the domestic GSM (global system for telecommunications) market will accelerate the price wars.

Samsung, the No 3 handset vendor in China, reportedly has been granted a licence to sell GSM handsets in the country.

Previously, Samsung's GSM phones were imported or smuggled into China.

"I expect Samsung will significantly drag down the prices, as its costs have been curtailed with the licence," Yu said.

Samsung also captured the world's No 3 spot last year, posing a competitive threat to Motorola.

Price wars would further erode the market share held by Motorola and Nokia, analysts said.

The combined market share of domestic handset makers will reach 50 per cent this year, they predicted.

It could be even higher, some analysts suggest.

Xu estimates that share could reach 60 per cent this year.

"Fifty per cent sounds a little conservative, considering the aggressive momentum of domestic makers in the marketplace," Yu added.

"I expect the current market leaders, Motorola and Nokia, will hold a combined share of no more than 43 per cent."

Tom Masci, Motorola's Asia-Pacific handset chief, said last week the US company hopes to maintain its roughly 30-per-cent share of China's handset market this year.

China had more than 200 million mobile subscribers by the end of November, indicate MII statistics.

Yu said it will be hard for Motorola to reach its target with the increased competition from domestic makers.

Price wars would no doubt alter the landscape of China's mobile phone market, industry observers said.

"The market will see more mergers and acquisitions in the coming two years, with the escalating of competition," Yoshikazu Miyazawa, assistant manager of Matsushita's mobile telecommunications operations, told Business Weekly.

Some small and mid-sized players will be squeezed out of the market unless they can offer new technologies or "cutting-edge" services, he said.

Futuristic and stylish phones might stimulate spending on handsets and offset manufacturers' shrinking margins, the manager said.

"Mergers and acquisitions will be the major trend in the coming years in the mobile phone manufacturing sector," Yu predicted.

The number of domestic makers could be reduced to five or eight after an industry reshuffling in the coming years, analysts said.

(Business Weekly January 22, 2003)