Why Cracking China's Mobile Market Could Prove Too Tough
More and more mobile companies are trying to gain a foothold in a country where white-label phones once ruled the roost, but some analysts say that attempts to crack what is now the world's largest market may be a waste of time.
White label phones - phones created by one company which are then rebranded for another - accounted for about half of the Chinese handset market in 2010, according to research firm Gartner.
It estimated that white label handset sales dropped 7 percent in 2011 to 186 million units, or 42 percent of all mobile phones sold in China, and plummeted another 30 percent in 2012. This move away from white label products has coincided with Chinese manufacturers changing strategies and releasing more phones under their own brand.
"This market will go to the Chinese players who can out innovate and out manufacture at the price points required. If a mobile player is from the U.S. or Europe, I would not bother fighting this fight," Victor Basta, managing director of Magister Advisors, a boutique M&A advisor in the technology field, told CNBC.com.
Apart from the low-end phone, the affordable smartphone (feature phone) and the high-end flagship devices for the richer of China's booming middle class are also in demand.
"Low end smartphones costing just $50-$100 are proving very popular in China right now – the problem however is competition is fierce," James Gautrey, global equity analyst at Schroders told CNBC.com.
"There are literally hundreds of firms producing these handsets meaning it is near impossible to make money in this space. That is at least partially why you have not seen the likes of Samsung and Apple, who dominate the developed world, enter that space."
But Samsung has had success with affordable smartphones (feature phones) and has produced the REX series, similar to Nokia's Asha series that targets similar markets. There are even calls for Apple to release a more affordable version of the iPhone.
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"Asha is the one that is selling well hence Samsung coming out with Rex. Whitebox vendors are the main competitors in this space so only vendors that can benefit from economies of scale can see good margins," Carolina Milanesi, research VP at Gartner Research told CNBC.com
Samsung remains in top spot for smartphone sales in China in the third quarter of 2012, according to the latest data from research firm IDC. Lenovo, more known for PC manufacturing, is in second spot, the report said. Apple has dropped to sixth spot but is expected to be boosted by the new iPhone 5 handset.
But the low-end market can still attracts device makers, with Nokia launching the new Nokia 105 model at the World Mobile Congress in Barcelona. The phone's battery will last 35 days if left on standby, Nokia says, and reports say it will cost just $20. That would help the group to target the rural and isolated populations of the developing world, with Nokia telling CNBC it will be rolled out in over 100 countries.
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"The problem is, low-cost phones often mean low profits. Most device makers who want to be profitable should avoid the low-end phone market, in our view," Neil Mawston, Executive Director at Strategy Analytics told CNBC.com.
But homegrown firms such as ZTE and Huawei, which are moving away from their white label pasts, show little concern.
Lizin Cheng, president of ZTE's of North American region told CNBC.com that 40 percent of the company's revenue is still from China, with the firm climbing up the ranks of global device sales too. When asked about the threat a new low-end Nokia could pose, Cheng said that the firm did not concentrate on the strategy of rivals.
"We don't care what our competitors do," he said. "We just concentrate on what we're good at."
Scott Sykes, head of international media affairs at Huawei told CNBC.com that the group has its sights set squarely on the smartphone market.
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"We're going to continue to apply our R&D muscle to this platform," he said. "This is where the opportunity for innovation is, This where the margin is."
David Garrity at GVA Research suggests that there may be even more reason as to why the two Chinese firms - turned multinationals - may be having success in the country
"As a government, China will not allow the success of any handset OEM (original equipment manufacturers) other than Huawei, Lenovo or ZTE or other indigenous firm," he told CNBC.com
"The days of Nokia or Motorola (especially now as a Google subsidiary) reaping the benefit of the China market are gone."
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China imposes unnecessary trade barriers that are designed to misappropriate intellectual property developed by non-Chinese technology companies, according to Garrity, giving TD-SCDMA as an example - a 3G format not used in Western markets.
"Second, China's perpetual privacy violations should cause concern for any mobile firm seeking to do business there. On the other hand, India poses a greater opportunity that is likely to prove a worthwhile pursuit."
Huawei told CNBC.com that any insinuation that Chinese firms were gaining preferential treatment was false, while also indicating that technically mobile phones can receive seven different band frequencies.