China has become the world's largest mobile phone producer, attracting increasing investment both from home and abroad. However, experts suggest that investors should watch their step.

Last year China produced 240 million handsets and exported about 140 million, the highest number in the world.

Insiders predict the production capacity is set to rise this year as new producers begin manufacturing.

Xiao Chang is the senior economist of China Information Industry Association.

"There will be 40 more firms to start manufacturing mobile phones this year. The total annual production amount may exceed 500 million units. This is more than 80 percent of the world's total consumption."

From last year transnational companies have been speeding up their investment in China's robust mobile phone industry, building their Chinese branches into global supply plants.

Between 1999 and 2004, overseas investors have injected about 3.6 billion US dollars into China.

They have been establishing technology research centers for mobile telecommunications. They have also been engaging in the production of parts and accessories, such as integrated circus, LCD screens and Lithium-ion batteries.

Meanwhile, domestic firms have achieved substantial progress in both production and sales. The market share of domestic brand mobile phones is now above 50 percent.

However, experts are reminding investors to be cautious when increasing their capital in China, because the overall profitability of the country's mobile phone industry is witnessing a continuous decline.

Xiao Chang explains.

"Judging from the global supply and demand of mobile phones, the expected production of mobile phones is too much for the market. The over production will worsen the competition among manufacturers."

An escalating price war is now underway due to over-supply in the market.

Another reason behind the downward trend is the comparatively weak R&D and after-sales services of domestic firms.

For theses reasons experts say investors should analyze the market demand and risks carefully before entering the sector.

The National Development and Reform Commission has said it will take measures to rectify the industry, but it has yet to specify exactly what it will do.

(CRI February 21, 2005)