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Cellphone makers urged not to put faith in China

Taiwanese mobile-phone manufa-cturers should decrease their dependence on China, since its handset market is expected to undergo major shifts amid a gloomy outlook for the rest of the year, industry analysts said yesterday.

A combination of oversupply and the economic impact of the SARS epidemic have resulted in an escalating crisis in China's mobile-phone sector.

"A profound correction in the sector is inevitable," said Ann Liang (梁嘉鈴), a market researcher at Gartner Inc in Taipei.

Local vendor consolidation, production cuts and a withrawal of smaller firms from the marketplace is expected to begin later this year, Liang said.

"Taiwanese handset makers will not be affected by the adjustment if they don't over-rely on China," she added.

According to the Market Intelligence Center (市場情報中心), Tai-wanese companies produced more than 10 million handsets in the first quarter of this year, of which 25 percent were shipped to China. Chinese mobile-phone makers often buy and re-label phones from overseas, most of which originate from Taiwan or South Korea.

But in the second quarter, the financial impact of the SARS outbreak cut demand in China, and Taiwanese makers exported only 8.3 million handsets, of which 20 percent were shipped to China.

The outbreak actually had its greatest effect on the Chinese market in May, and over the past two months the demand started to see a slow rebound amid lukewarm demand.

"The current market situation is still very unclear and probably unpleasant," said Chang Chih-ming (張志銘), an executive of Compal Electronics Inc (仁寶).

"Therefore we prefer to be more conservative [in doing business there]," he added.

Earlier this month, Compal -- Taiwan's second-largest handset maker -- adjusted its handset production forecast for this year to 30 million units from 50 million units, according to Chang.

There are about four months worth of inventory, or 20 million handsets, currently awaiting sale in China. Most of them are entry-level, black and white handsets, he added.

Gartner originally expected sales in China would jump to 62 million units this year from last year's 55 million, but now says the figure will likely stay below 60 million.

In an effort to avoid the tribulations of the Chinese market, Compal has decided to produce more top-end and color-screen handsets instead.

"We would like to diversify our list of clients and increase cooperation with Western handset brands," Chang stressed.

About one fifth of Compal's handset revenues come from China, where the company has a major client, TCL Mobile Communication Co, China's No. 2 cellphone maker.

While Compal and its subsidiary Arima Communication Corp (華冠) have already produced a number of handsets for US-based Motorola Inc and Japan-based Matsushita Electric, the maker of Panasonic-brand products, on a contract basis over these three years.

Another industry analyst reminds Taiwanese makers to keep their eye on competitors from across the Strait.

"Chinese handset companies' manufacturing skills are improving significantly," said Feng Lin (林育烽), an researcher at MIC.
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