China's homegrown cellphone handset manufacturers will continue to see operating margins squeezed over the rest of this year as there is no sign that the intense competition will abate soon.
The market will get chillier as new competitors crowd in following the recent introduction of a standardized licensing policy for the industry, said Ann Liang (
"The new policy will allow new vendors into the market, which will bring more volatility and intensifying pressure for consolidation," said Liang in an interview.
Last year, Chinese consumers bought around 68 million handsets, according to Gartner's data. Nokia was the leading vendor with around 20 percent market share, followed by Motorola Inc with 12 percent.
Ningbo Bird Co (
Domestic handset makers saw their operating margins decline last year as the industry was marred by overcapacity and competition with foreign brand names like Motorola, Nokia and Samsung Electronics Co, which brought to the market quality high-tech models.
TCL Communication Technology Holdings Ltd, the handset arm of TCL Corp, earlier this week said its handset gross margins fell to 14.4 percent last year from 21 percent in 2003.
Meanwhile, China's top economic planning agency has issued new rules aimed at standardizing the process of approving investment in the production of mobile phones and wireless telecommunications systems.
The new rules are widely viewed as less strict than the previous system under the Ministry of Information Industry.
As the industry grappled with eroding margins, Liang believes that an increasing number of Chinese handset makers will look to other emerging markets to digest their inventories and capacity.
"China vendors may be able to find a place in emerging markets such as Southeast Asia and Russia, where consumers' requirements for handsets are more basic and less sophisticated [than China]," said Liang.
Indeed, TCL has already announced plans to expand its original equipment manufacturing to Russia and strengthen existing business in Latin America, the Middle East, India and Africa markets.
It also intends to develop new markets in Indonesia, Philippines and the Middle East.
Meanwhile, Ningbo Bird aims to double exports of handsets this year, up from 3.38 million units exported last year, targeting developing markets such as Southeast Asia, Eastern Europe and India.
Despite such measures, Liang expects one in six mobile handset manufacturers in the China market will leave the business within two years as part of a gradual consolidation,
By next year, Liang expects only around 25 to 30 of the 37 current handset manufacturers will still be around.
"I believe that would be the more ideal scenario where the players would have room to survive," she said.