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Cyborgs and Biochips
China's local phone makers get no respect

A Question of Quality: Science imitates nature for better computers

When Mao Zedong exhorted the masses to resolutely support China's national industries, he obviously didn't have mobile phones in mind. Today's average Chinese citizen takes a much more pragmatic view of homegrown products -- they are buying foreign handsets in record numbers. "I don't trust domestic brands," says Tan Wen, a Beijing clerk. "They haven't been on the market for long, and I don't trust the quality."

Was that the Great Helmsman twitching in his transparent sarcophagus? Tan could well be speaking for an entire generation of cellphone users in China. The world's three dominant cellphone makers, Nokia, Ericsson and Motorola, account for upwards of 85% of China's handset market. The remainder is being fought over by other foreigners like Samsung, Sony and Siemens, and about 11 domestic Chinese companies. When the year began, the domestic producers were estimated to have a minuscule 3% of the market, although it may have doubled since then.

Local companies are missing a huge opportunity. U.S. brokerage Lehman Brothers says China can expect average annual growth of 44% in cellular subscriber numbers over the next four years, from 43 million at the end of last year to 183 million by the start of 2004 (see table below). The challenge for China's domestic manufacturers is clear: Capture a substantial piece of the market for new phones that will accompany that astonishing growth.

None of the domestic companies has yet hit on a surefire strategy for accomplishing such growth, but it isn't for lack of trying. Some manufacturers have emphasized after-sales service. This approach, however, does little to bolster the confidence of consumers already skeptical about the reliability of domestic phones. Listen to Bai Yan, who works for a pharmaceutical concern in Beijing: "When I buy a mobile phone, I'm not looking for after-sales service. I want a quality phone that will last. There is peace of mind in buying a well-known brand." Yang Dacheng, professor of telecommunications engineering at the Beijing University of Posts and Telecommunications, is more succinct: "The more domestic players tout their repair network, the more people stay away."

Another strategy has been to advertise heavily, often using Chinese celebrities. One leading domestic producer, Kejian, will spend more than $4 million for a prime-time advertising slot on China Central Television this year. Ningbo Bird has featured Taiwanese pop star Coco Lee in its television and print advertising blitz. Bird sees no alternative to advertising aggressively. "We've entered a period where we have to go this route," says Sui Bo, general manager of the company's sales division. "We must prop up our brand name." Without a strong advertising campaign, he predicts, "we would die in a vicious cycle of low profile and low sales."

Kejian also focuses on second-tier Chinese cities such as Wuhan, Chengdu and Shijiazhuang, leaving the biggest markets Beijing, Shanghai and Guangzhou to the global leaders. That's a sound strategy for domestic companies, says the Finnish mobile phone manufacturer Nokia. But Yang suggests this and other approaches do not address the core problem: lack of technological sophistication in China. "We are forever behind [the foreign manufacturers]," says the Beijing academic. "Haier and Bird are merely [foreign component] processing plants. They haven't grasped the technology. They've adopted a brand-name strategy devoid of their own technology." Eastcom, which claims to be China's largest domestic mobile-phone manufacturer, is responding to the criticism by teaming with Motorola. Eastcom produces fully half of Motorola cellphones sold in China. "A relationship between competitors will work as long as you have a win-win situation where both partners will benefit," says Eastcom CEO Shi Jixing. "We can help Motorola introduce their products in China on a massive scale. Motorola wants to bring elements of their [research and development] to Asia. We learn a lot from them."

Gong Zhengjun, deputy general manager of mobile operations at Zhongxing Communications in Beijing, says his company realizes that focusing on advertising is only a temporary fix. "We must rely on a solid technological base to promote R&D, production, sales and service." This may be a bit too late, with demand for mobile phones exploding and China's entry into the World Trade Organization (WTO) around the corner. Foreigners already control so much of the handset market that WTO entry isn't likely to cause new losses to China's domestic manufacturers. They are already floundering in the deep end of global competition. Quick, someone call the lifeguard -- and a swimming coach.

With reporting by Fons Tuinstra/Shanghai

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