China Cellphone Output
Surged 50% in First Half

ANDREW BATSON / Dow Jones Newswires 30jul03

BEIJING—The output of Chinese cellphone makers surged in the first half of 2003, threatening to add to a supply glut that is crushing profit margins in the world's largest handset market.

That is bad news for major foreign manufacturers like Motorola Inc. and Nokia Corp., who have already seen their results pressured by an excess supply of phones in China's highly competitive market.

"We believe inventory levels have in fact doubled from the beginning of the year," wrote BNP Paribas Peregrine analyst Voon San Lai in a recent report. Because of "massive overcrowding of the market, while volumes could still be robust, profits are going to be much more difficult to come by."

The Ministry of Information Industry said output of GSM-standard phones rose 50% from the year earlier to 71.8 million units in the first half, of which 31.6 million were exported. Production of CDMA-standard phones more than quadrupled to 10.4 million, of which 5.3 million were exported.

GSM, or global system for mobile communications, is one of the most widely used mobile telecom protocols and is the dominant standard in Asia and Europe. Its main competitor is CDMA, or code-division multiple access, which is growing rapidly in popularity in China and the U.S.

A total of 43.2 million mobile phones in both major standards were sold domestically in the first half of the year, according to the ministry's report. Domestic companies, which have been expanding aggressively to gain market share, accounted for 55% of those sales, a gain of 16 percentage points from last year.

The ministry's figures count mobile phones sold from the factory to distribution channels, not sales to end-users. That means they aren't reliable for measuring consumer market share. Nor do they account for the number of unsold phones still in the channel, which industry observers say has been growing rapidly since early 2003.

But it is clear that major foreign brands are threatened by a host of new domestic competitors who have increasing access to the latest technology, and no compunction about cutting prices to gain market share.

Tina Wang, an analyst with Norson Telecom Consulting, said Chinese domestic brands already hold more than 30% of the cellphone market, though they are unlikely to reach the 55% share implied by the wholesale statistics.

Local media reported estimates by CCID Consulting Co. that Motorola had a market share of 15.5% in the second quarter, still the leader even though its share declined by 5.9 percentage points from the first quarter. Nokia came second with 14.7%, down three percentage points from the first quarter, while domestic manufacturer Ningbo Bird Co. was third with 11.9%. TCL Mobile, an arm of TCL International Holdings Ltd., is another big local player.

The declining market shares of industry leaders speak of a market that is getting very crowded. The ministry report said there were 37 licensed foreign and domestic mobile phone makers in China at the end of 2002, who together have a manufacturing capacity of 200 million units a year.

BNP Paribas Peregrine expects China's handset shipments to reach 72 million in 2003, up from 62 million last year and about 17% of the global total. It has downgraded its annual forecast from 78 million because of a temporary sales slump in May during the outbreak of severe acute respiratory syndrome, or SARS.