Tier 1 manufacturers starting to understand the China price

At a conference last December I listened to an interesting presentation from Madeline Duva, then CEO of China MobileSoft, entitled: ‘The China Price’. The title was taken from a Business Week article which explained that China’s combination of low cost manufacturing and high quality technology was making it an economic powerhouse. As CEO of a company which worked closely with many local Chinese handset manufacturers, Madeline was ideally placed to see how this was becoming a reality in the telecoms sector.

CMS was acquired by US software company PalmSource on the same day.

However, today the competitive landscape is changing. This recent article from Reuters highlights the difficulties facing many domestic Chinese manufacturers and the progress of global brands like Nokia and Motorola. There are several forces at work here:

– Fierce competition among local manufacturers – of which there are as many as 50 operating under official government license and many more sub-licensees – is taking its toll. Even a market as large as China, which accounts for about 100m new handset sales every year, can only support a handful of vendors in the long-term.

– Global manufacturers such as Nokia and Motorola have changed the dynamics of the market in their favour by playing to their strengths: investing in design, usability and quality assurance.

– Chinese government policies, designed to encourage domestic handset production, have actually helped global manufacturers to better understand and compete in the local market. With punitive import tariffs for handsets manufactured outside China, global giants like Nokia had no choice but to invest in developing local factories and working in partnership with local firms. In doing so, they gained the same access to low cost labour and married it with their existing economies of scale.

Of course, this is not to suggest China’s handset market isn’t still thriving. Subscriber numbers continue to grow, the economy as a whole is expanding and existing consumers are demanding more expensive and sophisticated handsets even as new markets in rural regions are opening up. China’s larger manufacturers, such as ZTE and Huawei are witnessing remarkable growth in both handsets and infrastructure sales.

What we’re seeing is market forces at work: sub-scale players are being forced out of business or acquired, while more established players are expanding and benefting from greater volumes and reach. At the same time global manufacturers are working out how their existing formula needs to be adapted to suit local market conditions and which of their international strengths they can use in China.

The point at which it will become really interesting is when Chinese manufacturers like ZTE – which last year recorded handset unit shipment growth in excess of 100% – start acquiring more sophisticated design and marketing expertise. ZTE has been particularly active in reaching out to international markets and recently conducted a road-trip throughout Europe to promote closer links.

These companies have always had the ability to cycle through faster product development iterations; if they can demonstrate an understanding of the cultural requirements in international markets, they could become global manufacturers in their own right.

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