The days of China's small cellular phone manufacturers are numbered, as a special State Council policy protecting domestic mobile phone producers will expire at the end of this year.

People buying new mobile phones seen through a mobile phone cover displayed at a store in Beijing. The country's mobile phone users, now totalling 242 million, recently surpassed the number of fixed-line phone users, which stands at 240 million. [Reuters]

Under the policy, the government forbids companies other than licensed mobile phone producers from importing spare parts.

Lacking core technology and the ability to make microchips, many domestic mobile phone producers depend heavily on imports of key parts to survive or else make their money by simply changing the brand names of almost-finished foreign products.

The Ministry of the Information Industry (MII) recently issued a verbal warning to cellular phone producers, saying it will gradually limit their imports.

It seems very likely that MII will dismiss 80 per cent of the new import applications, said a Beijing-based industry insider who declined to be named.

However, an MII official said the optimization of domestic manufacturers will be gradual, adding that "those that are economically strong are sure to be happier in the long run".

Imports of mobile phone parts and semi-finished products by domestic producers came to 25 million units in the first half of this year, with most of the imported CDMA phones arriving as virtually finished products. Such imports for all of last year only amounted to 17 million phones.

The MII warning is widely considered an emergency step by the government to trim alarmingly huge stockpiles of phones, while the insider added that the new initiative is expected to result in reductions in about six months.

Soaring stockpiles

According an estimate by Motorola, a leading seller and producer of mobile phones in China, as many as 20 million cellular phones are currently stockpiled by the nation's producers, while industry insiders believe the MII statistics to be higher.

Although it is almost impossible to determine an accurate figure, excessive production capacity is obvious.

The combined annual output capacity of the 37 licensed mobile phone manufacturers in China, 25 of which are supported by foreign investment, ranges between 230 million and 250 million units.

A quarter of that is sold in China and another quarter is exported. That means roughly half of the units produced end up in stockpiles.

According to the unnamed industry insider, a rational stockpile should equal the volume of one to two months worth of sales. But the 20 million excess mobile phones in China are equivalent to total sales accumulated in three to four months.

Even with an effective curb on imports, the stockpiles are not likely to be downsized to normal levels before the end of this year, he said.

A number of experts have even warned that the problem of massive overstock will be the straw that breaks the entire industry if something is not done.

Cut-throat competition

Stockpiles may become the focus of the regular quarterly MII inspections of the mobile phone manufacturing industry beginning in the third quarter of this year, the insider said, and there are economists who anticipate that the government may revoke some licenses.

Although the special State Council protection policy forbids unauthorized companies to import, assemble or produce mobile phones and the MII stopped issuing new licences in May 2000, some licensed companies took advantage of loopholes in the policies by secretly hiring other firms to assemble their imported parts, said Wang Bingke, a senior MII official.

At the end of last year, the actual number of domestic producers rose to just shy of 100, sharing the brand names of the 37 authorized firms.

But the lack of core technology puts their futures in question, as they cannot even offer complete repair services.

A majority of these companies will not survive the coming comprehensive market reshuffle, said Peng Xinhao, vice-president of DBTEL, a mobile-phone producer in Shanghai.

The price wars that started in February will quickly force two-thirds of the 37 producers out of the market, Peng said.

He added that the battle would accelerate next year, leaving only six or seven economically sound contenders still standing in 2005.

And half of those winners will be foreign brands, while the rest will be local producers, Peng predicted.

"This is only natural, much like the reshuffling of China's television industry," he said. The larger survivors will boast annual sale volumes of 20 million units each, and the smaller ones can expect to sell six million units apiece.

In the United States, Peng noted, manufacturers of a mature product are normally whittled down to between four and seven competitors after a similar price war.

Producers confident

Few producers and sales agents, however, believe they will be the ones to go down.

"The conclusion that the mobile phone industry is about to collapse is more than sensational," said Hu Yuzhong, executive vice-president of China Postel Mobile Communications Equipment Co Ltd, the country's largest marketer of mobile phones.

Workers assemble mobile phones at a production line of Amoi Electronics Co. Chinese brand mobile phones have claimed half of the domestic market share in the first half of this year. [newsphoto.com.cn]

While Hu admitted that about four brands his company markets have been hit by slow sales and are suffering from excess stock, he said the problem is not universal and a large number of brands still enjoy stable sales. The sluggish sales of some brands are related to the unsatisfactory designs, quality or services of their producers, he said.

The overall mobile phone industry in China is still in a growth period, asserted Hu.

In Peng's estimation, annual sales will increase from the current 55 million units to 80 million units in two years.

The country's mobile phone users, now totalling 242 million, recently surpassed the number of fixed-line phone users, which stands at 240 million.

Currently, 16 per cent of the nation's population are mobile phone users, far below the 30-per cent ceiling the MII anticipated, said Gu Xianli, an adviser with Yiguan Consultancy Co.

On average, a user changes mobile phones every 18 months, and the fast emergence of new designs is shortening that period, Gu said, as consumers become increasingly keen on the latest functions.

Other experts, however, noted that it is precisely the rapidly changing designs and technology involving software and microchips that makes the stocks dangerous.

Just like computers, stockpiles of mobile phones lose their value very quickly by staying on the shelves.

Heated investment

The high profitability of mobile phone manufacturing has led to overheated investment by existing producers, both foreign and domestic, as well as from other sectors.

The profit rate for the industry on the whole is between 20 to 30 per cent, one of the highest in the electronics sector.

So there is a tendency among many domestic companies to blindly expand production capacity in a bid to earn larger market shares, explained Wang Bingke.

Many new factories are seeking alliances with licensed producers to assemble mobile phones, while larger producers are launching new manufacturing facilities.

For instance, the new mobile phone production base recently established by telecommunications giant TCL, with its headquarters in Guangdong Province, has roused concerns from pessimistic analysts.

With the new facilities, TCL plans to expand its mobile phone production capacity to 20 million units a year.

In the first quarter of this year, the production of domestic brand mobile phones reached 14 million units, accounting for 33 per cent of the national total, while sales hit 13.9 million units, setting a record high ratio of 51.3 per cent of the national total.

Meanwhile, Hu noted, Ericsson, Siemens and Philips have shut down their home country production facilities in recent years and, along with Nokia and Motorola, expanded their investment in China.

Foreign manufacturers now have a combined annual cellular phone production capacity of about 50 million units in China.

What worries many analysts is that the overproduction of cellular phones is just one example of similar problems haunting many other industries in China, such as automobiles.

Qiu Xiaohua, deputy director general of the National Bureau of Statistics, warned that efforts must be made to prevent the investment craze from spreading to traditional industries in which China is already the largest manufacturer in the world, including steel and textiles.

China's cement production sector, for example, became the world's largest in 2002 with the construction of several hundred new plants designed to produce a combined total of 200 million tons of cement annually.

Qiu called for special attention to the sharp contrast between high increases in investment and a slow rise in consumption.

Investment is estimated to have contributed to 70 per cent of China's economic growth, while the contribution made by individual consumption was just 20 per cent.

Meanwhile, renowned economists are pressing the government with ever-growing urgency to limit loans and rein in government investment to avoid potential inflation down the line.

Facts and Figures

-- In the first quarter of this year, the production of domestic brand mobile phones reached 14 million units, accounting for 33 per cent of the national total, while sales hit 13.9 million units, setting a record high ratio of 51.3 per cent of the national total.

-- It is estimated that as many as 20 million cellular phones are currently stockpiled by the nation's producers.

-- At the end of last year, the actual number of domestic producers rose to just shy of 100, sharing the brand names of the 37 authorized firms.

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