Handset makers expected to have unpleasant winter

Taiwanese handset makers are expected to see sluggish sales for the rest of the year due to oversupply in China, an analyst said yesterday at a forum organized by the Ministry of Economic Affairs.

"The short-term outlook for the [Chinese mobile phone] market is gloomy," said Sean Kao (高鴻翔), a research director of the Market Intelligence Center (市場情報中心).

"With high inventories in China, we don't expect the market to significantly rebound by the end of the year," Kao added. Nearly 25 percent of Taiwanese handset makers' sales come from China.

Prior the SARS outbreak earlier this year, inventories had already started to pile up in China, where Taiwanese and international vendors competed with each other to gain market share.

"But the epidemic simply worsened the oversupply situation as consumer spending withered quickly after people chose to stay home to avoid contracting the disease," Kao said.

There are about five months worth of inventory -- 35 million handsets -- currently awaiting sale in China, driving prices to the floor over the past few months, he added. A clam-shell phone, for instance, is priced at 1,000 yuan, down 65 percent from the same period last year.

With no sign that the inventories may ease any time soon, Compal Electronics Inc (仁寶), Taiwan's second-largest handset maker, adjusted its second quarter production forecast from 900,000 to 500,000 units at an investors' conference Tuesday.

"We lowered our forecast because we understand that it may take several months for the market to absorb the huge inventories," said Compal chief executive Ray Chen (陳瑞聰).

About fifth of the Compal's handset revenues come from China, where the company has a major client, TCL Mobile Communication Co, China's number two cellphone maker.

Another analyst is optimistic about the market outlook, saying the market is gradually recovering.

"Handset makers just went through the worst time of the year," said Ann Liang (梁嘉鈴), a market researcher at Gartner Inc in Taipei. "The outbreak of SARS actually hit the hardest on that market in May."

Gartner expected phone sales in China jump to 62 million units this year from last year's 55 million, said it may now stay below 60 million.

According to MIC, Taiwanese companies produced more than 10 million handsets in the first quarter of this year, of which 25 percent were shipped to China.

But in the second quarter, SARS cut demand in China and Taiwanese makers exported only 8.3 million handsets, of which 20 percent were shipped to China. Local makers exported 40.3 million cellphone units last year, accounting for 8.5 percent of the global market share, according to MIC statistics.

US European vendors remain the major customers for Taiwanese handset manufacturers. Motorola has allocated a large portion of its production to BenQ Corp (明基電通) and Compal, while Sony Ericsson has contracted GVC Corp (致福) and Arima Communication Corp (華冠).