ANALYSIS OF STRATEGIES FOR THE MAINLAND CHINA MOBILE PHONE INDUSTRY

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1 International Journal of Electronic Business Management, Vol. 6, No. 2, pp (2008) 93 ANALYSIS OF STRATEGIES FOR THE MAINLAND CHINA MOBILE PHONE INDUSTRY Ching-Yi Chang * and Fang-Hua Wang Department of Business Administration Antai College of Economics & Management, Shanghai Jiaotong University, Shanghai, China ABSTRACT Since the liberalization of the telecommunications industry in Mainland China during the early 1980 s, the mobile phone industry has seen significant development, registering huge increases in the number of users & manufacturers, and in production capacity. However, based on domestic market share statistics, international brands (IBs) continue to dominate the mobile phone market, indicating that domestic brands (DBs) lag behind in the Chinese market. This study analyzes the five leading DBs that have the ability to compete with international brands in the Chinese market (Lenovo, Bird, AMOI, TCL and Konka), in areas such as their R&D, manufacturing and marketing, and summarizes the issues of industry competition as a whole. Company analysis will be followed by proposed development strategies for the overall domestic mobile phone industry. Keywords: Mobile Phone Industry, International Brands, Domestic Brands, Industry Competition, Strategies 1. INTRODUCTION Since the liberalization of the telecommunications industry in Mainland China during the early 1980 s, the mobile phone industry has seen significant development, particularly with government support of mobile communications infrastructure laid out in 1999 by the State Council, State-Affairs-Development File No. [1999]-5 [17]. After a few years of implementation, the number of officially recognized domestic manufacturers has grown rapidly, from nine in 1999 to 56 in October 2005 [17]; production capacity has also increased from 22.6 million devices in 1999 to 226 million in It is expected to exceed 500 million in 2008 [19]. The number of mobile phone subscribers in China has been growing significantly since 1998, from 43.4 million in 1999 to million in August 2005 [17], and it is expected to exceed 600 million in 2010 [18]. Table 1: Mobile phone market share in 2004 (%) [12] Brand Nokia Motorola Samsung Bird TCL Amoi Konka DBtel Sony Ericsson Philips Market Share (%) Table 2: Mobile phone market share ranking in Q2, 2006 (%) [3] Brand Nokia Motorola Samsung Lenovo Bird Sony Ericsson Amoi Philips TCL Konka Market Share (%) In terms of market share, in 2004 the top ten brands in the Chinese mobile phone market represented only 72% of the market (Table 1); the combined market share of the top five domestic brands (DBs) was 24.5%. The top five international brands (IBs) represented 47.7%. By the Q2, 2006, the top ten brands included five DBs and five IBs (Table 2), though the combined market share of the five DBs decreased to 21.37%, while the IBs increased to 63.7%, an increase of about 16%. The DBs seem to be hindered when competing with IBs for the Chinese market. It is paramount that DBs understand and develop advantageous business strategies, to compete with IBs in both domestic and foreign markets. This study analyzes the five leading DBs that are able to compete with IBs in the Chinese market, in aspects including their R&D, manufacturing and marketing, * Corresponding author: steven@cidgroup.com

2 94 International Journal of Electronic Business Management, Vol. 6, No. 2 (2008) and then summarizes the industry competition as a whole. This study also outlines some recommended strategies for development of the domestic mobile phone industry, so that better marketing strategies can be formed. 2. LITERATURE REVIEW In recent years, Chinese mobile phone industry studies, conducted by local scholars, have mainly focused on topics such as the strategies of individual corporations as a subject in business administration [9][22], industry development from the perspective of a segmented market [25], fluctuations in market share of foreign and DBs [13][29], competition in marketing [28][31], international strategic alliances formed by Chinese manufacturers [16], changes in industry structure and operation strategies [10][21] and business models [23]. Studies conducted by overseas scholars have included industry reports focusing on mobile information services [24] and mobile communications technology development [8][30]. The only related research to the mobile phone industry are primarily concerned with the research of past, present and future of the Chinese mobile industry [32]. Zhang and Prybutok [33] also conducted a comparative analysis of the mobile communications markets in China, the United States and Europe. In fact, there has been little international research on the mobile phone industry by the Chinese, and within the above-mentioned literature, there is no analytical discussion of competition in the Chinese mobile phone industry. Consequently, this study analyzed the strengths and weaknesses of the top five DBs to propose development strategies for their reference. 3. RESEARCH METHOD The number of officially recognized domestic manufacturers in China grew rapidly from nine in 1999 to 56 in October As more players entered the field, the level of competition intensified. In the second half of 2005 and the first half of 2006, five of the top ten mobile phone brands in the Chinese market, ranked by market share, were domestic (Lenovo, Bird, Amoi, TCL & Konka). Thus far, only these five have shown on ability to compete with IBs in the Chinese market. This study analyzes the five DBs in terms of operation strategy, level of market integration, economic scale & economies of scale, and product line features. This study also summarizes the domestic market challenges faced by the entire industry and proposes strategies for its development. 4. ANALYSIS OF THE TOP FIVE DOMESTIC BRANDS The greatest wish of Chinese mobile phone brands is to overturn the international brand domination of the market, mirroring the miracle of the Chinese home electronics manufacturers. Below we will analyze the top five DBs in the Chinese market (Lenovo, Bird, Amoi, TCL and Konka) and discuss their R&D, production, marketing, and operation strategies: Lenovo Lenovo s R&D is centered on the application of technology, with an emphasis on fashion and culture. In mobile phones, particular attention is paid to the R&D of core software; in the area of PDAs, attention is given to the R&D of application technology. By focusing on high-end products such as smartphones, camera phones and MP3 phones, Lenovo has cleverly avoided price wars. At the same time, it has achieved a major distinction from other domestic manufacturers; over 80% of its new products are originally designed models [15]. Lenovo began in sales and service, and has accumulated certain competitive advantages in information systems while building a fine tradition of quality services, extending the reach of its mobile phone customer service. In line with its development strategy, parts and components are purchased externally. With its experience in sales and marketing, product diversity, high technology volume and comprehensive customer service, Lenovo has succeeded in winning consumer recognition. In addition, through its long-term technical and outsourcing partnerships with Texas Instruments, Siemens AG and South Korean mobile phone manufacturer Sewon Telecom Ltd., Lenovo can maintain tight control over product cost, product release timing and product cycle, moving precisely to market rhythms. In mid-2003, Lenovo terminated its OEM operations to concentrate on original R&D products. During the early phases, it targeted secondary or lesser cities as a basis, promoting specific models through marketing campaigns to facilitate discussion points, while forming a close relationship with existing electronics stores and dealers [6][15]. Bird Bird collaborates with the French manufacturer Sagem, introducing the Sagem production line and advanced European management experiences to improve its R&D and management standards. This ensures the quality of products at the source. The purchase of parts and components is relatively more centralized. In R&D and production, Bird employs an outlet for technology strategy: Siemens products

3 C. Y. Chang and F. H. Wang: Analysis of Strategies for the Mainland China Mobile Phone Industry 95 are able to reach the end consumers directly through Bird s large sales network in China, and Bird can utilize Siemens advanced mobile technology development platform to design mobile phones with an original style, software platform and interface for the Chinese market, under the Bird brand. Furthermore, Bird has set up research centers in Ningbo, Fenghua, Chongqing, Chengdu and Nanjing, working with various academic institutions to nurture professional talent. Their R&D follows trends closely and new models continue to be developed and released, covering GSM/GPRS/CDMA specifications [2]. When Bird first rolled out its own-brand mobile phones, DBs were not well known. Many dealers were unwilling to sell Bird products. As a result, Bird had to create its own sales network, which extended into smaller towns; eventually including as many as almost 50,000 retail outlets, giving Bird the title, the Number One Mobile Phone Network in China. Although Bird was not strong enough to compete directly with foreign brands in metropolitan areas, its inexpensive products with good signal reception matched the nature and market environment of small to midsized towns. By adopting the development strategy of encircling the cities from rural areas, Bird quickly opened up the market and successfully elevated its product profile [2]. With R&D support, Bird has released several new mobile phone models this year, and its market share continues to grow on the back of a comprehensive sales network with professional post-sale service. In addition, their quality-first strategy satisfies both domestic and international demands. All aspects, from R&D and resource purchasing to production and post-sale service, are tightly controlled. As Bird s domestic market expands steadily, development of the international market is also progressing smoothly, moving Bird towards international brand status [2][5]. AMOI In the early years, AMOI was originally a home electronics manufacturer that built a positive brand image with its VCD players. Now, AMOI s DVD players and mobile phones are both regarded as high-end products, further strengthening its brand profile. AMOI cooperates with China Post Mobile, the biggest mobile phone dealer in China, for distribution of its products; this combines exclusive sales and distribution, so that its new products can be promoted rapidly across the nation. At the same time, AMOI is a savvy marketer, sponsoring sports events to gain publicity for its products. Its mobile phones and home electronics are also sold through the same network, doubling effectiveness [1]. AMOI s main business is end products in mobile communications. It is also taking steps to diversify into a core combination of communications, consumer electronics and computers. In R&D, AMOI has a 1,200-strong team, with three research centers in Xiamen, Shanghai and Nanjing. For domestic sales, AMOI has built a comprehensive network, and is currently working to set up international sales channels (in the US, Singapore and Malaysia), gradually implementing an international strategy [11]. In the first half of 2006, the company s mobile phone income was 1.84 billion RMB; total exports were 154,700 units, (1.12 billion RMB) [20]. TCL TCL was originally a home electronics manufacturer. By refining consumer market segmentation and precise positioning, TCL concentrated on a powerful hardware design, production capacity, and sales network for its mobile phone business. The group s experience and human resources in selling home electronics, in addition to the attention given to customer service, all contributed to swift expansion of its market size. TCL products include GSM/GPRS/CDMA products, with feature designs incorporating characteristics of Chinese culture, making them fashionable, sophisticated, rich in value content and collection worthy. As a domestic brand, TCL is leading the pack. Its strategies of building a nationwide sales network, actively utilizing promotional campaigns, working closely with dealers and distributors, and focusing on customer service through its fast response team, are integral to TCL s success [26]. As China s sixth most valuable brand, TCL Mobile has grown rapidly in the five years since its creation through eye-catching achievements. In the three fiscal years from 1999 to 2002, TCL Mobile revenue grew exponentially 263 fold, pushing it to the number one position in the inaugural DeLoitte Technology Fast 500 Asia Pacific ranking in 2002, which identifies the fastest growing high-tech firms in the region. At the end of 2003, TCL was again flying high in the DeLoitte Technology Fast 500 Asia Pacific, making it the only firm to be ranked in the top five in two consecutive years [7]. TCL Mobile is moving ahead with internationalization plans, already having extended into Southeast Asia, Russia and Germany, a process helped along by its partnership with Alcatel. Its corporate development and continuing expansion requires the participation of many like-minded talents, propelling forward the huge international warship that is TCL Mobile [27]. Konka With its high profile in the home electronics industry, Konka is already a household name in China with strong international and domestic teams. It has two R&D centers in Silicon Valley and

4 96 International Journal of Electronic Business Management, Vol. 6, No. 2 (2008) Shenzhen and is expected to achieve an annual production capacity of 6 million units. Konka products are fashionable, individualistic, localized and suitable for business users, with particular emphasis on original R&D. Konka s technical partners include Lucent, Intel, Infineon and Qualcomm. [14]. The primary strength of Konka Mobile is its dependence on the Konka Group, which gives it advantages in branding and distribution. Konka established its brand with Color TVs. It has long-term partnerships with traditional outlets (such as home electronics stores), providing Konka Mobile an advantage. However, with the gap in technology prowess and brand appeal between Konka Mobile and leaders like Sony Ericsson and Motorola remains considerable, and as increasingly more traditional home electronics manufacturers enter the mobile phone market, Konka can only attract mid to low-end users with its products. At the same time, as major international brands are also segmenting the market, Konka s market space will be further compressed, and it is likely to face more intense competition from both mobile phone manufacturers and those cross over from home electronic brands. Therefore, Konka s strategic success will be determined largely by the speed with which it brings out new products, and its ability to control costs [4][14]. We will now discuss levels of vertical integration in R&D, design & manufacturing, product marketing, and sales channels, for these Top 5 manufacturers: a. Component Integration Businesses tend to focus their efforts on developing new products, expanding the market and building a brand image; they rely on outsourcing for components. However, several DBs already have a mature home electronics and component business, and should have sufficient ability and the appropriate conditions for component integration. b. Software R&D Integration Two groups can be distinguished in this aspect; the first includes companies such as TCL and Lenovo, who have a strong technical background in IT and prefer to develop their own products. The second group includes those like AMOI and Bird, who collaborate with foreign companies that offer professional R&D skills or outsource part of their software design. Software R&D in China s mobile phone industry has not been significant, with most firms relying on collaboration with more advanced foreign firms in core technology and function c. Hardware R&D Integration Chinese mobile phone manufacturers basically outsource this as good style and design give products high added value and profitability. Furthermore, working with a professional partner in design and hardware R&D can be beneficial to the manufacturer in product update & renewal, as well as market expansion. d. Manufacturing Integration The strength of most manufacturers are their economies of scale; they tend to engage in this aspect of the value chain themselves. Some businesses outsource or ODM for IBs. e. Sales Channel Integration Sales channel strength varies between manufacturers. Most choose to work with professional dealers and distributors, though some rely on their own channels and networks in home electronics or related industries. However, exclusive sales and distribution are a likely trend for the future. f. Brand Integration Most manufacturers choose to create their own brands. Generally speaking, the brands discussed here were already established brands in home electronics, IT and other communication-related industries, before crossing over into mobile phone manufacturing; brand building should pose little problem for them. At the moment, manufacturers are not making significant investments in the upper end of the chain, specifically in software and hardware R&D, mainly because of their limited technical skills. On the other hand, like most Chinese businesses, they have the advantage of manufacturing. At the lower end of the value chain, because DBs have a unique understanding and then ability to reach the domestic market, they tend to establish their own sales networks and provide quality customer service. 5. DISCUSSION AND SUGGESTION The rapid growth of the mobile phone market in China has contributed to a highly competitive environment. The following are the conclusions of this study: a. Relatively Small Sizes The production capacity of JV manufacturers set up by major IBs in China is very high. For example, in the first half of 2006, the total production volume of Motorola was 37.5 million units, with the production volume of Nokia approaching 37.7 million units. Production volume of the top five DBs only reached about 20.2 million [20]. b. Slow Expansion into International Markets In 2005, the number of mobile phone units exported from China was 228 million, of which 75.1 million were exported by Motorola, 32.8 million by

5 C. Y. Chang and F. H. Wang: Analysis of Strategies for the Mainland China Mobile Phone Industry 97 Nokia, 17.4 million by Sony Ericsson, 13.9 million by Siemens and 11.3 million by Samsung. DBs have yet to expand into international markets [20]. c. Weak Software Design Capability So far, DBs have a solid grasp on mobile phone structural technologies and style design, application-level software development, radio frequency (RF) module design and mass production. Although DBs have moved from OEM/ODM to core technology R&D, they are still lagging behind IBs standards in baseband chip, RF chip and software production. d. Significant Improvement in Hardware Design Capability Manufacturers have the capability to design, develop and manufacture GSM, GPRS, CDMA products, with breakthroughs made in the development of mobile communication system software and mass production technology of key accessories. They can build mobile phone R & D and production capability, from accessory components to finished products. Currently, DBs can mass-produce LCD panels, lithium-ion batteries, chip resistors, chip inductors, multi-layer printed boards and other key accessory components, as well as some testing instruments. e. Advantages in Manufacturing Capability Because manufacturing is the competitive advantage held by the Chinese mobile phone industry, few businesses outsource production. f. Parallel Use of Own Outlets and Cooperative Channels As Chinese manufacturers have a unique perpective of the domestic market and can capitalize on opportunities effectively, they often prefer to build their own sales networks. Their distribution channels are concentrated mainly on secondary or tertiary markets, trying to capture market share in areas out of reach of international giants, such as small to midsized cities and rural areas. Manufacturers with backgrounds in home electronics or IT, such as Konka and Lenovo, often rely on existing sales networks and marketing experience. g. Developing Own Brands Chinese manufacturers care very much about building their own brands, investing huge resources in advertising, brand promotion, and aggressive marketing, to increase their consumer and network operator influence. They are also rolling out new products at an intensive pace. Manufacturers with backgrounds in home electronics or IT already have a high brand equity and can count on this crucial advantage to promote their products h. Increasing Importance in Post-sales Service Because of competitive market conditions, manufacturers are paying more attention to post-sales service. Many DBs have established their own customer service systems and are competing on the basis of service quality. Implementation of regulations on the responsibility to repair, accept, and replace mobile phone products means that consumer rights are now better protected, pushing corporations to treat post-sales service as the new battlefield. We propose these development strategies for manufacturers to deploy, taking into account their individual features and strengths. 1. Size Control production of key components: Take advantage of industry clustering by combining with other component manufacturers to facilitate packaged supply and production for the core business. Enhance cooperation with network operators: As network operators control more client resources, they will have more bargaining power over wholesale prices and bundled sales of mobile phones. It is vital that manufacturers take the size strategy by enhancing their partnerships to benefit sales. Achieve breakthroughs in chips & other upstream technology: Only by obtaining the core technology can a company maintain its pace with the various businesses provided by network operators. 2. Differentiation Strengthen design of mobile phone application software Increase the pace of new product release Flexible production capability Enhance brand image and profile Improve customer service standards 3. Focused targeting Strengthen mobile phone products and clarify market position (high or low-end) Engage in aspects of the value chain (R&D, design, manufacturing, branding & marketing, sales & service) to enhance one s strengths REFERENCES 1. AMOI, 2006, html/index.asp. 2. Bird, 2006, /index.asp. 3. CCID, 2006, 4. Chinabgao, 2005, eereports/8675.html. 5. CI Insight, 2005, 6. Cww, 2006, 5/11/34540.htm. 7. Donews, 2006,

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