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Overproduction of handsets in China increasing

Overproduction of handsets in China increasing

BEIJING-China’s Ministry of Information Industry (MII) estimates the production capacity of the 36 mobile-phone manufacturers in China will reach 250 million this year, up from 100 million last year, while sales are expected to reach 170 million handsets. Some analysts fear the world market will not be able to absorb the remaining 80 million handsets, leading to a fierce price war among the manufacturers.

The forecast of brokerage firm Salomon Smith Barney is more conservative, predicting a domestic supply of 119.9 million handsets and a demand of 123.4 million.

Domestic producers increased their market share to between 30 percent and 35 percent last year and may increase their combined share to 50 percent this year. Ningbo Bird ranks third in handset sales in China following Motorola and Nokia.

Some analysts predict a debilitating price war in the coming months, while others expect technology and sales networks to drive competition. The short replacement cycle of mobile-phone handsets could still ensure a significant demand if consumers are attracted by new technologies and services, such as camera phones and multimedia messaging service (MMS).

Handset issues are affecting China’s mobile operators as well. Analysts estimate that between 20 percent and 50 percent of China Unicom’s CDMA subscribers were lured away from competitor China Mobile thanks to huge handset subsidies. Such claims, however, are hard to substantiate, and the Ministry of Information Industry (MII) has not published its own estimate of the number of subscribers switching carriers.

Edward Yu, president of Beijing-based Analysys Consulting, was quoted in China Daily Business Weekly as saying China Unicom spent an estimated 1 billion yuan (US$121 million) in handset subsidies. Goldman Sachs estimated the average subsidy per CDMA handset to be as high as US$300.

Many CDMA subscribers are renting their handsets while agreeing to pay minimum amounts in call charges each month.

China Mobile has launched its own GPRS-handset subsidy scheme in a few selected provinces.

Guo Chang, an analyst with CCW Research, also quoted by Business Weekly, said operators should phase out subsidies to avoid a cash drain that would make it difficult to improve services. Continued subsidies may also undermine the operators’ profitabilities.

The major driver of competition this year is expected to be services, not prices.