China puts cell push on speed dial

"The Chinese government has said it wants to move its domestic handset makers from 25 percent to 85 percent of the local market in three years," said Howard Curtis, vice president of global services at Portelligent. "We think from a technology, design and manufacturing standpoint it's plausible they will get to over 50 percent of the market. I'd be very concerned if I were Nokia or Motorola."

Motorola is said to sell nearly a quarter of its handsets in China, one of the largest and fastest-growing cellular markets. The Yankee Group (Boston) estimates the number of cellular subscribers in China will grow from about 172 million this year to 210 million next year.

The Portelligent report contains an analysis and teardown of 17 cell phones from eleven Chinese OEMs including Amoisonic Electronics Co. Ltd., Ningbo Bird, Capitel, Haier Group, Konka Group, Legend Group and TCL. The OEMs account for about 20 million of the roughly 80 million to 100 million cell phones sold in China annually.

Several sources report that China's handset makers have jumped quickly into the market by rebranding existing systems or basing designs on reference platforms provided by chip makers or third parties. But only six of the 17 phones in the teardown report showed signs of being based on a single chip vendor's platform, said Portelligent president David Carey, who conducted the teardowns over the past three months.

"There was much less [use of reference designs] than we had expected. A majority of the phones used separate baseband and transceiver suppliers," Carey said. "We had thought they would be using a more monochromatic supply chain, but that wasn't the case."

Philips Semiconductors and Texas Instruments Inc. were the most popular baseband providers among the 17 phones in the study. Silicon Laboratories and Infineon Technologies led in transceivers, while "the usual suspects" of Conexant, Hitachi and RF Micro Devices dominated the group in power amplifiers, Carey said.

Cell phones could be set to follow a similar pattern as color TVs, DVD players and PCs-products that are now primarily made in China, said Doug Grant, a business development manager for Analog Devices Inc. (Norwood, Mass.). China's OEMs are rapidly moving toward greater hardware differentiation by selecting their own components and providing more sophisticated interface software, Grant said. ADI claims to have at least seven handset design wins in China, including one with TCL.

"The burning question," said Carey, "is how rapidly we are descending into a calculator-like, one-chip solution." Carey thinks the industry could split into a large market for cheap voice phones and a niche market for handheld voice and computing gadgets. "That could play right into China's hand," he said.

TCL and Ningbo Bird are already the second- and third-largest GSM handset suppliers in China, surpassing Nokia in that country but topped by Motorola, according to market watcher Forward Concepts (Tempe, Ariz.). In terms of total cell-phone sales in China, however, Motorola and Nokia are still tops, with respective estimated sales in 2002 of 18.7 million and 11.3 million handsets, compared with a respective 6.8 million and 6.5 million for Ningbo and TCL, according to figures from China's Ministry of Information Industry.

Konka and Haier might have the most potential of the estimated 25 cell-phone makers in China, based on their established sales of TVs and white goods in the United States, said Will Strauss, principal of market research firm Forward Concepts Co..

"They have well-developed distribution in the West, so I expect them to do better in their overseas markets. TCL and Ningbo have no Western presence," Strauss said.

"There's good evidence a couple of these companies are selling to cost-sensitive markets in Russia and India," said Curtis. "They may not be able to create a global brand, but they could become an export presence."

What's more, he said, "the Chinese have zero R&D expense. They have very low overhead because all their IP [intellectual property] comes to them in chip sets."

Nevertheless, China needs to find a way to consolidate its current host of OEMs if the country wants to become a greater global force in handsets, said Portelligent's Curtis. "It would be better for China if the country had six or seven stronger players," he said.

The Portelligent report cites the P5 Pen Phone, from Haier Group, as one particularly innovative design (see www.eet.com/story/OEG20030616S0074).

Only five of the phones in the teardown had color displays, and none had the camera modules now popular in Japan. On average the phones used about 10 chips and 336 discretes, figures that compare with entry-level Java phones from European vendors.

Evidence of manual assembly, such as hand-soldered crystals, appeared in some phones. Others made fashion statements specific to China's market, sporting jewelry-box-like cases and casings that used synthetic sapphire and cubic zirconium.