DRAGONS AT THE GATES:

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1 DRAGONS AT THE GATES: A Survey and Analysis of GSM Handsets in the Chinese Market (2003) ****************** Portelligent, Inc. info@teardown.com (Copyright 2003) DISCLAIMER: All company names, product names, and service names mentioned are used for identification purposes only and may be registered trademarks, trademarks, or service marks of their respective owners. All analyses are done without participation, authorization, or endorsement of the manufacturer. Any cost analyses presented in this material are estimates prepared by Portelligent from generally available data. While Portelligent believes that these estimates reflect the probable costs, the actual producer did not supply the data, and therefore the actual costs may be different from these estimates. Furthermore, Portelligent extends no warranties with respect to any information in this document, and shall bear no liability whatsoever for the use of the information by Portelligent Inc. All rights reserved. Do not reproduce, distribute, disseminate, photocopy, fax, transmit, download to a shared database, or otherwise copy, transfer, sell, publish, or send this material, or any portion thereof, by any means without the express written permission of Portelligent, Inc.

2 Table of Contents Study Background, Market Context, and Technical Discussion 1.0 Study Definition and Objectives The Cellular Phone Market in China Overview and Commentary The Wireless Services Sector Subscribers and Providers 5 [Box -- Dragons at the Gates: Key Observations and of the Conclusions Study] The Competition in Handset Manufacturing Handset Sales Versus Handset Production Into the Dragon s Lair: Outlook for the Future 11 [Box -- Possible Industry Configurations Some Scenarios for the Future] Study Findings Technical Overview Design Overview IC and Component Content Metrics-Based Comparison of Handsets Product Packaging and Presentation Profiles of Domestic Chinese Handset Makers Amoisonic Ningbo Bird Capitel Eastcom Haier Kejian Konka Legend Panda Soutec TCL Detailed Design and Manufacturing Analysis TCL Electronics Content and Analysis of 16 Chinese Handsets Amoisonic A Bird SC Bird V Capitel C Eastcom EG Eastcom EL Haier T Haier P Kejian K Dragons at the Gates Portelligent, Inc. (2003) Page 2

3 Table of Contents (Continued) 6.10 Konka K Konka C Legend G Panda GM Panda EmoL Soutec Hi TCL S Dragons at the Gates Portelligent, Inc. (2003) Page 3

4 1. Study Definition and Objectives This report documents an investigation of GSM-protocol cellular phones released in the Chinese market by domestic Chinese handset makers in late 2002 and early Our objective is to use Portelligent s product teardown methodologies to analyze semiconductor content, key component technologies, and prevalent design trends in these handsets, in order to characterize how the Chinese market is evolving, which IC makers are winning the most design-ins, and what approaches Chinese handset makers are taking in designing and fabricating their products. a given handset actually took place, and, in particular, whether a given design reflects the technical competencies of the Chinese firm which markets the handset in the Chinese domestic market, or of the Korean or Taiwanese firm which works with the Chinese partner. While acknowledging this complexity, in this study we treat the partner firms as, in effect, a unified design and manufacturing entity the capabilities of which are being applied to a business opportunity in the Chinese market (and which can potentially be brought to bear in other markets in the future). In selecting the handsets analyzed in this study, we have concentrated on those provided in the Chinese market by domestic Chinese makers, rather than on the offerings of the major multi-national players operating in China, such as Nokia, Motorola, Samsung, and Sony Ericsson. We do so because the Chinese makers are a relatively unknown quantity that bear study at the level of Portelligent s product teardown analysis, and because we dedicate considerable effort to examining the product offerings of the leading global handset providers in our ongoing product teardown work. In addition, we have chosen to focus the study on GSM handsets, although CDMA phones represent a new and growing part of the market in mainland China. We have made this choice, because GSM handsets represented over 90 percent of unit sales in China in 2002, because more design variation is evident among GSM handsets than among their CDMA counterparts, and because the GSM sub-sector of the market is better established and more evolved than is the CDMA sub-sector at this time. It should be noted at the outset that a considerable number of domestic Chinese handset makers are known to be working closely with partner firms in Korea and Taiwan on an OEM and ODM basis. It is thus difficult to dis-aggregate where the design and fabrication of Dragons at the Gates Portelligent, Inc. (2003) Page 4

5 2. The Cellular Phone Market in China Overview and Commentary On all dimensions, the market for handsets in mainland China is huge, and still growing; on most dimensions, it is already the largest national market in the world. In addition to the number of cellular phones and wireless terminals being sold in the Chinese market million forecast for 2003 by the Chinese government China has grown into a primary location for the low-cost manufacture of handsets. The conjunction of these two attractions means that almost all European, Japanese, Korean, and North American firms that have ambitions in the global handset market have set up shop in China. A key strategic question is, will they reap the rewards of their investment in China, or does that market have the potential to descend into a hyper-competitive bloodbath that will leave foreign competitors basically empty-handed, and reverberate in the form of increased competition and lower profit margins around the world? 2. 1 The Wireless Services Sector Subscribers and Providers The number of subscribers to wireless communications services in mainland China at the end of 2002 was estimated at 200 million by the Chinese Ministry of Information Industry (MII) and at 220 million by the private market research firm MFC Insight. Growth over the past five years has been extremely rapid, following approximately the following curve: million million million million million plus The most recently reported MII estimates, for the end of March 2003, peg the number of subscribers across the nation at million. Multiple analysts have described the growth rate in the subscriber base through 2002 and early 2003 as being approximately 5 million new subscribers per month. In April 2003, however, growth slowed to 4.23 million new customers, according to MII statistics, due at least in part to the impact of the SARS (Sudden Acute Respiratory Syndrome) epidemic on consumer spending. Dragons at the Gates: Key Observations and Conclusions of the Study (1) Based on the GSM handsets analyzed in this study, Chinese handset makers (working sometimes with partner firms in Korea and Taiwan) are designing and manufacturing cell phones comparable in functionality and quality to those produced in Europe and North America. While design solutions range from employing an entire chipset provided by a single supplier to mixing components from a range of IC makers, Chinese handset makers are pursuing an IP-Lite Model, that goes perhaps a step beyond the path that Samsung has pursued. The Chinese makers are exploiting chipsets and devices available in the merchant market to permit flexibility in system design while minimizing R&D expenses. All major IC components present in the handsets studied were supplied by US and European semiconductor manufacturers. ICs ranged from leading-edge devices of recent vintage to obsolete products possibly employed to reduce costs. The mechanical design, form, fit, and finish of the handsets in the study were generally good. The underlying manufacturing capabilities reflected in the handsets analyzed also appear to be good, with characteristics such as high-quality fine-pitch solder joints and micro-via board Dragons at the Gates Portelligent, Inc. (2003) Page 5

6 technologies frequently encountered. There were, however, selected instances of more manual assembly processes than would be typical in Europe or the US. Reliability is an unknown, although some devices in the handsets studied were, for example, underfilled, presumably to increase durability and product life. (2) Market trends strongly suggest that the Chinese handset market is entering a hyper-competitive phase, likely characterized by slowing market growth, increasing competition between domestic Chinese handset makers and the multinationals, mergers and acquisitions, increasing price pressure on IC and component suppliers, and eroding margins on handset sales. There will be considerable excess of handset manufacturing capacity over domestic demand in the handset industry in China for the foreseeable future; if this capacity is fully applied, it has the potential to leave the world awash in handsets. (3) The Chinese handset industry will become a global force. Consolidation will proceed in the domestic industry over the next two-three years. Coupled with strong support from the Chinese government, which views wireless as a strategic sector and has a reported goal of seeing domestic handset makers achieve an 80- percent share of the Chinese market within three years, the likely outcome is the emergence of a smaller number of Chinese handset suppliers, the most successful of which sell into global markets. (4) Multinationals who have invested heavily in China to establish local manufacturing capabilities and market share will see the competitive landscape shift as domestic competitors exploit their emerging design and manufacturing capabilities, and establish viable brands. Half of the approximately one dozen foreign handset makers now active in China will be out of the Chinese market within three years. For at least several, the retreat from China will be a significant factor in a broader decision to exit the handset business entirely. On the other hand, multinational vendors that succeed in the hyper-competitive Chinese market will be well positioned to advance their global ranking. The set of wireless service providers in China is surprisingly small, with just two -- China Mobile and China Unicom dominating the market. The largest wireless service provider in China is China Mobile, with a subscriber base that was pushing 124 million at the end of March 2003 and approximately 70-percent market share. China Mobile operates a GSM network. In addition to standard GSM-based voice communications, the company offers GSM/GPRS services for data communications, voic , SMS and MMS messaging services (a GPRS service with MMS support for multimedia messaging was introduced in May 2002), caller ID, small-item payment, and, on a limited basis, mobile banking. China Mobile also offers Monternet (Mobile + Internet), a wireless Internet access service for handsets which supports WAP (Wireless Applications Protocol). Pursuing China Mobile is China Unicom (China United Telecommunications), the nation s second largest service provider, with approximately a 30-percent market share. Like China Mobile, China Unicom s primary offering is a GSM-based service, but the firm also began operating a CDMA network in January As of March 2003, China Unicom had approximately 61 million GSM subscribers versus just 7 million CDMA customers; however, of the 25 million subscribers the firm forecasts it will add during 2003, half or more are likely to be CDMA users. One reason for this shift is that, in March 2003, China Unicom rolled out CDMA2000 1x infrastructure that supports enhanced data services, including Internet access, MMS, and LBS (location based services). The firm is also testing a GSM 1x capability that was developed by Qualcomm, in Dragons at the Gates Portelligent, Inc. (2003) Page 6

7 which dual-mode handsets (GSM and CDMA2000) are used to layer CDMA2000 1x data services on top of a standard GSM voice capability. 2.2 The Competition in Handset Manufacturing The competitive scene for cellular handsets in China, particularly by comparison with the duopoly in wireless services, is highly fractionated and increasingly competitive. As of April 2003, the Chinese government had licensed 39 firms (14 foreign most of them large global handset makers and 25 domestic) to design and manufacture cellular phones for the Chinese market (see Table 1 for a list of the licensees). According to one source of market-share statistics, EM Data Service, the market leaders in 2002 in sales of handsets within the mainland China market ranked as follows: Motorola -- Nokia -- Samsung Electronics -- Siemens AG -- TCL -- Bird -- Sony/Ericsson percent 25 percent 7 percent 7 percent 6 percent (domestic Chinese maker) 5 percent (domestic Chinese maker) 4 percent Philips -- Panasonic -- Haier -- Amoisonic -- Konka -- Eastcom -- Others -- 3 percent 2 percent 2 percent (domestic Chinese maker) 2 percent (domestic Chinese maker) 1 percent (domestic Chinese maker) 1 percent (domestic Chinese maker) 6 percent (some 25 players) Of particular significance is the market share held by the domestic Chinese makers treated as a group. This share is growing rapidly from an estimated 3 percent in 1999, 8 percent in 2000, to percent in 2001, according to data from the Chinese Ministry of Information Industry (MII). Estimates for domestic share in 2002 range from 22 percent to 40 percent, depending on the source (the data from EM Data Service presented above, for instance, point toward the lower end of the range). However, it is clear that the percentage market share held by the domestic makers is growing rapidly as the overall market size increases. Also clear is that it is a matter of industrial policy in China, which has been explicitly stated by MII, to grow the domestic share further, to 45 percent in 2003 and to as much as 80 percent in Dragons at the Gates Portelligent, Inc. (2003) Page 7

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9 2.3 Handset Sales Versus Handset Production A feature of data on the primary dimensions of the Chinese handset market is that they vary considerably depending on source (see Table 2 for a depiction of some useful sources of data on subscriber population, handset sales, and handset production, and the variations among the different sources). Nowhere is this more apparent than in the area of handset sales in the China market, where sales estimates vary substantially. As with wireless service subscribers, however, the pattern of rapid market growth from 1998 to the present is clear, from sales of perhaps 12 million handsets in 1998 to an MII projection of million for One factor that complicates the tracking of handset sales in the Chinese market is that sales of used handsets satisfy a significant portion of demand for handsets. Deutsche Bank s Asia Pacific Equity Group, for instance, estimates this element of handset sales in mainland China at 27 percent for Table 2 also provides data on estimates for the annual production of wireless handsets in mainland China. Again, estimates vary by source, but the following represents a reasonable set of consensus numbers over the recent past: million handsets million handsets million handsets million handsets million handsets plus What is striking about these figures is that, despite the burgeoning market for cell phones in China, production considerably exceeds consumption, with the excess to reach as much as million units in With estimates of world demand for cell phones falling between 430 and 500 million units for 2003, this is a large number indeed. In the past, much of the excess of handset production over consumption in China was explained by the manufacturing activities of the foreign firms operating in China, which were using their lowcost Chinese production bases to manufacture for export to other regions of the world, as well as to produce for the Chinese market. As domestic Chinese firms come to represent a larger proportion of the overall Chinese market, however, a second element comes into play: an increasing percentage of the excess of production over domestic demand will come from domestic players who are themselves producing for export. Dragons at the Gates Portelligent, Inc. (2003) Page 9

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11 2.4 Into the Dragon s Lair: Outlook for the Future This report is dedicated primarily to a detailed analysis of a significant sample of handsets produced by Chinese makers (in some cases, in concert with their partners in Taiwan and Korea), with the intent of shedding light on such questions as what design approaches these companies have adopted, what is the level of engineering sophistication exhibited, who are the leading suppliers of ICs and components to the market, and how do Chinese handset makers compare to their offshore competitors. Certain signals in the description of the broader handset market in China, however, are so strong and so disquieting that they bear mention here. (1) Given the number of players in the handset market in China, the level of sophistication of many of the leading domestic makers (as will be demonstrated in this report), and the large excess of handset production over sales in the Chinese market, we forecast the China handset market will enter a hyper-competitive phase over the next 1-2 years. Significant reduction in the rate of sales growth, due to prolongation of the SARS outbreak or other factors, could exacerbate the impact and leave the world awash in handsets. (2) Hyper-competition can take many forms, but some combination of the following outcomes is likely: deep price-cutting in the marketplace, leading to a price war and substantial reduction in margins for handset makers; a wave of bankruptcies, mergers, and acquisitions among the domestic makers (and potentially providing opportunities for the acquisition of domestic players by multi-nationals); a very trying period for the more than a dozen foreign handset makers operating in China, with at least some of them withdrawing from the Chinese market (and, possibly, from the handset business); and continued and increasing price pressure on the suppliers of commodity ICs and electronic components to the handset makers. (3) Industry consolidation will reduce the large number of domestic players in the handset industry (as many as 25 at present). However, some of the survivors will emerge as major presences, with broader global reach. On the basis of unit production, we expect as many as three of the top ten handset makers worldwide to be Chinese firms by (4) Further bifurcation of the handset market into: (a) a technology-intensive high-end segment with handsets characterized by broadband data-transmission capabilities, full smart-phone tool kits, and the capacity to function as an applications platform for business, entertainment, and mcommerce, and, (b) a low-end segment focused on commodity handsets that provide good-enough voice communications at a very low price point. (5) The Chinese government views wireless communications as a strategic industry, and has in place a goal of seeing domestic handset makers achieve an 80-percent share of the domestic market in As hyper-competitive effects grow manifest, the tendency of the Chinese government to favor domestic players over their international competitors will if anything grow more intense, making the market even more difficult for the multinationals. (6) While domestic Chinese IC and electronic component suppliers are not represented in significant numbers in our analysis of the content of Chinese handsets, we expect this to change in coming years. Just as domestic handset makers, working in concert with Dragons at the Gates Portelligent, Inc. (2003) Page 11

12 offshore firms in Korea and Taiwan, have seized significant market share in handset sales, domestic IC and component makers, with the active support of the Chinese government, will make inroads. This is admittedly a somewhat dark projection, and is intended in part as a corrective to the irrational exuberance that has characterized trade press depictions of the wireless telecommunications sector in China over the last several years. It remains a fact that more handsets will be sold in China than in any other national market in the world for the next three-to-five years. In global competition, the likely winners will be precisely that set of firms which succeed in China. Thus, evasion is not an option: companies that seek to endure or emerge as global leaders in the handset industry must confront and overcome the challenges of China. Possible Industry Configurations Some Scenarios for the Future The hyper-competition which we project will emerge in the Chinese market over the next several years will function as a refiner s fire, making some competitors bigger and more efficient, while others fall by the wayside. Hyper-competition may also lead to more farreaching shifts in the competitive structure of the handset industry itself. While not a primary focus of this analysis, we will introduce several scenarios that represent possible evolutionary directions for the industry. These trends might emerge first in China, given the size, ferment, and competition in that marketplace, and then migrate around the globe. The Status Quo Scenario: The global handset industry continues to be dominated by five to ten large, multinational firms that boast substantial R&D resources, sell under their own brands, and are able to negotiate with the wireless service providers as relative equals. Beneath this top stratum of suppliers, a second tier of much smaller handset makers function in specific regions and niche markets. Under this scenario, several Chinese firms will likely emerge in the top tier of global handset makers over the next five years, while several multi-national incumbents fade. The Technology-as-King Scenario: The demand for technical innovation in the handset industry continues to increase. A primary driver is the insatiable appetite consumers demonstrate for wireless services for business, entertainment, and mobile commerce that demand very high-speed network connections, powerful computing capabilities in compact packages, sophisticated software systems that can be upgraded in the field, and massive data storage. This appetite translates into wireless service providers who ceaselessly pressure the handset makers for constant improvements in feature set, form factor, Dragons at the Gates Portelligent, Inc. (2003) Page 12

13 and component technologies. Keeping pace with this wave of innovation requires massive, global R&D operations, and the ability to couple technical advances with product development efforts that meet stringent time-to-market goals. Software is at least as important as device technology in defining the winning products in the marketplace. In this scenario, the second-tier handset makers cannot compete, and a small number of large, technology intensive organizations that prove most adept at linking a deep understanding of trends in consumer preferences with their R&D capabilities come to dominate the industry. The Sneaker Scenario: While technical innovation continues in the handset arena, the pace of change in the underlying technologies slows, the platform stabilizes, and the locus of competition (and innovation) shifts more strongly over time into branding, marketing, and channel management, as is arguably the case in the market for sports sneakers today. Firms that have strong brands but limited technical capabilities in wireless communications (Nike, Eddie Bauer, and Porsche come to mind) take advantage of the increasing availability of off-the-shelf reference designs, wireless design-forhire outfits (many of whom are second-tier cell phone makers who reposition themselves as design houses), and contract manufacturing to enter the handset market. The large, incumbent handset makers, saddled with huge R&D operations and high overheads that are no longer needed to compete, increasingly find themselves hard put to compete in a market where consumers are purchasing not so much a package of wireless communications capabilities, as a life-style image. The Travel Alarm-Clock Scenario: Brand may still matter for a few status-conscious consumers when they purchase a travel alarm clock, but it doesn t drive the market. The underlying technology has become a commodity. The primary features that users want are well understood, and firms around the world can provide this feature set, either under their own brands or as contract manufacturers, at very low cost. If it emerges that most consumers don t want 3G and 4G services, with all the bells and whistles, but just to communicate, the travel alarm-clock scenario becomes a real possibility. And the intensity of price competition in the hyper-competitive environment of the Chinese handset market will force competitors to rapidly evolve corresponding business models. Portelligent does not pretend to know which of these scenarios will prevail in the future handset business, and we think it likely a mixture of scenarios like these will dominate in different sub-segments of the overall market. The Chinese market will serve as an important and early data point in identifying which scenarios are coming to the fore. ************************* 3. Study Results Technical Overview The set of phones that Portelligent analyzed for this report comprise 17 GSM handsets from 11 Chinese makers: Amoisonic, Bird, Capitel, Eastcom, Haier, Keijian, Konka, Legend, Panda, Soutec, and TCL. A Portelligent representative acquired the handsets, primarily in southeastern China, between February and May One of the phones (the Panda EMOL98) has PDA functionality while another (the Haier P5) features a voice recorder and a laser pointer. The set of handsets analyzed is summarized in Table 3. Table 4 provides data on semiconductor content, while Table 5 identifies and describes key components such as display modules and batteries. Subsequent sections of the report provide detailed teardown analyses of each of the 17 handsets. We analyzed the model 3388 from TCL in drill down detail at the level of a full Portelligent product teardown report, including complete bill-of-materials, system block Dragons at the Gates Portelligent, Inc. (2003) Page 13

14 diagram, power measurements, and a thorough sequence of product teardown photos that reveal packaging techniques and design decisions. The other 16 phones have been examined with an emphasis on semiconductor content using the data formats which Portelligent has developed for its Chipography Reports. Dragons at the Gates Portelligent, Inc. (2003) Page 14

15 3.1 Design Overview In general, the 17 phones exhibit a wide range of design sophistication and component technologies. The phones appear to be original designs with the exception of the Panda GM818, which is a virtual clone of the Ericsson T-66. As noted earlier, many of the domestic Chinese handset makers work with partners in Korea and Taiwan (some of these relationships are identified in Table 1), and it is difficult to ascertain where, for example, design work and board assembly took place. However, among the products analyzed in this study, the Eastcom EL660 appears to be designed and manufactured by Acer, while the Kejian K518 is co-branded with Samsung. Several of the phones include innovative features such as the laser pointer noted above. Dragons at the Gates Portelligent, Inc. (2003) Page 15

16 The mechanical design, form, fit, and finish of the handsets analyzed in the study were generally very good. The hinge design on one of the flip phones was clever, allowing all the internal sub-assemblies of the phone, such as the PCBs and the display module, to be completely assembled and tested outside the enclosure and then placed in the housing intact. The workmanship on this phone was superb as well. Many of the boards in these phones contained components with fine (0.4 mm) pitch leads that were soldered with well formed fillets and showed no evidence of solder bridging or loose solder balls, suggesting a mature automated process capability. However, there was also evidence of a considerable amount of manual labor in some cases: several of the phones had components that were hand soldered to achieve specific requirements such as 3-D packaging. About 70 percent of the LCDs employed monochrome displays, although there were several attractive color displays among the handsets in the test group. Dragons at the Gates Portelligent, Inc. (2003) Page 16

17 3.2 IC and Component Content Many of the phones in the test set contain chips from several chipmakers, rather than using an entire solution and reference design from a single IC vendor, indicating considerable design capability and engineering sophistication. At the device level, while products from most leading IC makers appear within this group of phones, several dominant suppliers are in evidence. TI and Philips, for example, supply over half the baseband processors in the handsets we examined. Likewise, Infineon and Silicon Labs provide over half of the transceivers. Cypress Semiconductor was the largest SRAM supplier, with Intel the leading provider of flash memory chips. The majority of power amplifier modules were supplied by RF Micro Devices and Conexant, although four of the products contained PA modules from Hitachi. Figures 1 through 6 show the incidence by IC maker across the set of 17 handsets of baseband processors, transceivers, power amplifiers, SRAM, flash memory, and EE PROMs, respectively. It is interesting to note the presence of Agere transceiver chips in two of the phones (Capitel C6288 and Eastcom EG860), although Agere is no longer supplying transceivers, indicating that the chips may have been purchased at bargain prices. In another case, a commodity component declared obsolete by its vendor in 1999 appeared in a Dragons at the Gates Portelligent, Inc. (2003) Page 17

18 handset, and was probably purchased very inexpensively. At the other end of the spectrum, several of the ICs identified were the smallest versions yet seen by Portelligent, indicating that the latest versions of the chips were used in these products. A matrix showing which baseband processor and tranceiver vendors were used in each product is shown in Table 6. Figure 7 shows the range of costs incurred by the phone makers for the 4-MByte flash memory chips found in the phones in this study, estimated using Portelligent s IC cost model. This cost model takes the area of the chip as one important input. Thus, when a design rule change allows a die shrink, IC cost will decrease in proportion to the change in area, other factors being equal. It is interesting to note that frequently the lowest cost flash memory chips on the graph are from Intel, whose architecture has two bits of memory per cell and therefore has twice the memory density of conventional processes. AMD/Fujitsu has a similar architecture available but this was probably not deployed in the handset that contains an AMD/Fujitsu 4-Mbyte flash memory device. Dragons at the Gates Portelligent, Inc. (2003) Page 18

19 experience indicates a very high level of integration. In quite a few cases approximately half of the total silicon area is occupied by memory. As can be expected, the cost of the chips within products in a given product category rises in proportion to the capabilities of the individual product. 3.3 Metrics-Based Comparison of Handsets Figures 8-14 show how these products compare to each other and to a sampling of similar phones from the US (Motorola), Europe (Nokia, Siemens and Sony-Ericsson), and Korea (Samsung) for the following key metrics: die count, die area and die cost, module count, discrete component count, connector count, total electronic parts count, and estimated IC cost. In general, the figures show that the Chinese product offerings compare favorably with comparable handsets from other parts of the world. For example, component counts and die area values are fairly evenly distributed for all products of similar capability such as smartphones and phones with color displays. Figure 9 shows that several of the phones contain approximately 1 cm 2 of silicon area - a metric that in Portelligent s What was not in evidence in these handsets were ICs designed by domestic Chinese IC makers. It will be interesting to see if and when chipsets will be available from Chinese and Taiwanese semiconductor manufacturers, and what will be the impact on the domestic Chinese and worldwide markets. Further price pressure is anticipated. Dragons at the Gates Portelligent, Inc. (2003) Page 19

20 3.4 Product Packaging and Presentation Finally, the styling and product packaging of the handsets we analyzed for this study -- primarily the higher-end phones in the market place indicated that many of these handsets are marketed as luxury items that provide status to their owners. Several of the phones sport synthetic diamonds on their external housings, while one employs a sapphire. Most of the handsets ship in velvet-lined containers designed to make the customer think of a jewelry box. In several instances, the handset is packaged in its own elegant case, while accessories such as the charger, instruction manual, and batteries are separately boxed an unusual added expense when compared to mobile phones sold elsewhere in the world. Dragons at the Gates Portelligent, Inc. (2003) Page 20

21 4. Profiles of Domestic Chinese Handset Makers As of spring 2003, the Chinese Ministry of Information Industries (MII) had licensed 25 domestic Chinese firms to design and manufacture GSM handsets, CDMA handsets, or both. In addition, 14 foreign firms, most of them large multinational handset vendors, had also secured licenses. In this study, Portelligent has analyzed handsets produced by 11 of the 18 Chinese vendors who hold licenses for GSM phones. This section provides brief business profiles on these 11 companies, with pointers to their Web sites where available. Dragons at the Gates Portelligent, Inc. (2003) Page 21

22 4.1 Amoisonic Amoisonic Electronics Company was founded in 1981 as a joint venture between Xiamen City and Solid Electronics Company of Hong Kong. It was then incorporated as a public firm in June In November 2000, Amoisonic and Lucent announced a collaboration agreement, under which Amoisonic can develop GSM handsets that will interoperate with Lucent s GSM network infrastructure in China. Dragons at the Gates Portelligent, Inc. (2003) Page 22

23 Amoisonic, based in Xiamen, Fujian Province, produces consumer electronics products including DVD players, LCD TVs, and home theater systems, in addition to handsets. Spurred by a surge in its handset sales in 2002 (like Kejian and Haier, Amoisonic achieved approximately 2- percent market share in 2002), the company spun out its cellular handset operation. Also in March 2003, Amoisonic began to roll out a family of four GPRS capable GSM handsets that employ an Agere GPRS chipset. (which includes a third-party transceiver, believed to be a Silicon Labs device). For its next generation of products, Amoisonic will adopt Agere's Sceptre PF7 reference design for a new line of color-screen, GPRS-capable GSM handsets. The PF7 platform supports Class 10 GPRS data transmission, at speeds up to 53.6 Kbps for downloads. Amoisonic plans to commercialize a camera-equipped handset with a color screen by August 2003, according to trade press reports. Web site: Ningbo Bird Ningbo Bird, headquartered in Ningbo (Zhejiang Province), was founded in In 2002, Bird was the largest Chinese domestic brand, according to the Chinese Ministry of Information Industry (MII), producing 7.49 million handsets and selling 6.79 million handsets in the Chinese market. Estimates by Deutsche Bank indicate that Bird held approximately a 7-percent share of the Chinese handset market in Bird has a goal of selling 10 million handsets in 2003, according to reports in the Nihon Keizai Shimbun, a Japanese industry newspaper. handsets. Of the 7.5 million handsets the company manufactured in 2002, one million are reported to have reflected designs developed completely by Bird. The company procured handset modules from Sagem for 10 of its 20 handset models in On the manufacturing side, Bird and Sagem formed a 50/50 joint venture in 2002 to manufacture handsets. The manufacturing capacity of the joint venture is 10 million handsets in fiscal Furthermore, Bird has opened two new production facilities in 2002, bringing its total annual production capacity to 20 million handsets. In addition to the relationship with Sagem, Bird now has technical partnerships or OEM relationships with BenQ and Quanta of Taiwan, as well as LG Electronics, Pantech, Telson, Bellwave, and Sewon Telecom of South Korea. Bird has worked with Philips Semiconductor in the development of GSM handsets. Bird announced price reductions on its mid- to high-end handsets of several hundred yuan in late April In addition to the price cuts, made in an effort to gain market share, Bird s plans call for the company to broaden recognition of its brand, improve customer service, and accelerate the introduction of new handset models. In 2003, Bird will introduce additional models in the high-end segment of the handset market, as well as aiming to export 600,000 to 800,000 handsets to Southeast Asia. Bird has already taken initial steps toward creating an export business by initiating sales of handsets in Russia and India. Bird produces both GSM and CDMA handsets. Although it initially relied on strategic partner Sagem of France for system designs, the firm is increasing internal funding for R&D and product design on its Dragons at the Gates Portelligent, Inc. (2003) Page 23

24 Bird claims to invest approximately 6 percent of revenues in R&D, and to have a central R&D group of 120 researchers with strong university links. Web site: Dragons at the Gates Portelligent, Inc. (2003) Page 24

25 4.3 Capitel Headquartered in Beijing, Capitel Group, which belongs to PTIC (Posts & Telecommunications Industrial Corporation), was founded in A former microwave manufacturer, Capitel ventured into mobile communication products in Like Eastcom, Capitel belongs to China Putian Group. Dragons at the Gates Portelligent, Inc. (2003) Page 25

26 Capitel has Agere Systems, Qualcomm, and Texas Instruments as important technology sources. In late-2001, Capitel chose Agere s Sceptre platform, which includes a W3020 GSM transceiver chip together with a series DSP that inegrates a microcontroller, as the basis for a series of GSM phones. Pantech of South Korea is an OEM supplier of GSM handsets to Capitel. In late 2001, Capitel and Nokia announced the formation of a joint handset venture in Xingwang International Industrial Park in Beijing's Economic and Technological Development Area. Capitel has in place an R&D joint venture with Mobicom. In 2002, the firm secured a license from Qualcomm to produce both CDMAOne and CDMA2000 handsets, positioning it to offer both GSM and CDMA handsets to the Chinese market. Capitel s latest cellular phone introduction, the C6388, offers a color screen and wireless Internet access in a 73-gram product. Web site: Eastcom State-owned Eastcom, headquartered in Hangzhou, Zhejiang Province, and part of the China Putian group, is also known as Eastern Communications. The firm started life as a manufacturing operation of the Ministry of Posts and Telecommunications (now MII), and then was privately incorporated in Eastcom has Compal Electronics of Taiwan and Giga Telecom and Sewon Telecom of South Korea as OEM handset sources. Eastcom produces both GSM/GPRS and CDMA handsets. The firm forged an early alliance with Lucent in 1998 for use of that company s Sceptre platform in its GSM handset designs. In 2000, Eastcom proceeded to license a GSM baseband chipset and protocol stack software from Motorola. Eastcom now manufactures 2.5G handsets and cellular communications equipment in a joint manufacturing operation with Motorola, and is a major OEM supplier of handsets for the Motorola brand. In more recent developments, the Economic Daily reported in December 2002 that Eastcom was going to establish a cellular phone joint venture in Hangzhou with Compal Electronics of Taiwan. In March 2003, trade press reports indicated that Eastcom had given a contract for 300,000 handsets to Giga Telecom of South Korea. This will be an upscale clamshellstyle product with a TFT-LCD display supporting 65,000 colors. Eastcom has been struggling financially. The company reported million RMB ($24.87 million) in losses for Eastcom then reported a $14.18 million loss for the first quarter 2003, due to reduced profit margins from increasing competition in the handset sector. Web site: Haier As China s number one brand of electrical appliances, Haier, which is headquartered in Qingdao, Shandong Province, has annual revenues of over $8 billion and already ranks as the world's sixthlargest white goods maker, with production facilities in 13 overseas factories. Sales of white goods currently account for percent of the company s revenue. In the consumer electronics arena, in addition to wireless handsets, the Haier Group is making PDAs and personal computers. Haier s handset operations involve several partly owned subsidiaries. The Haier Group holds a 30-percent equity stake in Qingdao-based Haier-CCT, which was established in early Hong Kong listed Haier-CCT (which is also 46-percent owned by CCT Telecom Dragons at the Gates Portelligent, Inc. (2003) Page 26

27 Holdings Limited, one of the largest cordless phone manufacturers in the world) concentrates on the manufacture of cellular phones, distribution within China, and export. Recently, Haier announced that it will merge its handset operations with those of Pegasus Telecom Company, in which the Haier Group owns a 65-percent stake, and invest 250 million yuan RMB ($30.19 RMB 8.28/$US 1) to produce handsets. Haier s technology partners include Motorola, Philips, and Qualcomm. Dragons at the Gates Portelligent, Inc. (2003) Page 27

28 The company sources handsets from BenQ, Inventec, GVC, and Compal of Taiwan, as well as from Sewon Telecom of South Korea. Haier also has a relationship with UK-based Sendo. In November 2001, Haier took a license with Qualcomm that gives it rights to design and manufacture both CDMAOne and CDMA2000 handsets. At the time, Haier made a commitment to support Qualcomm s BREW (Binary Runtime Environment for Wireless) applications platform. Web site: Kejian Kejian Group, an enterprise originally founded in association with the Chinese Academy of Science in 1984, is China Kejian's (Kejian s) largest investor. China Kejian produces electronic medical equipment and a variety of digital communication products, in addition to handsets. The company also serves as a sales agent for imported cellular phones. Headquartered in Shenzhen, China Kejian sold 2.11 million handsets in 2002, giving it approximately a 2-percent market share in China, according to Deutsche Bank estimates. Kejian produces both GSM and CDMA handsets. The firm jointly operates a CDMA handset manufacturing plant with South Korea s Samsung Electronics, a major partner. Called Shenzhen Samsung Kejian Mobile Telecommunication Technology, this operation represents the largest manufacturing facility in China for CDMA handsets. Kejian is reported to be seeking to achieve an annual capacity of 6 million handsets in Kejian was the first Chinese handset maker to license T9 text input software from Tegic Communications. T9, which speeds input of text, is available for both English and Chinese, among a set of over 30 languages. Kejian managers have indicated that they wish to use T9 in order to speed adoption of SMS services among its subscriber base. Web Site: Konka Shenzhen-based Konka is a leading Chinese home appliance manufacturer, whose product line includes TVs, plasma display panels, and DVD players. The company was formed in It plans to output 6 million handsets in 2003, by introducing over 10 new models. Konka supplies GSM/GPRS and CDMA handsets. Konka is known to have BenQ, Compal Communications, and Arima Communications of Taiwan, together with Telson, Curitel, and Pantech of South Korea, as OEM suppliers for handsets giving Konka perhaps the largest stable of Asian partners among the Chinese handset makers. In October 2002, Konka gave a contract to Pantech and Curitel of South Korea for 300,000 GSM handsets. Konka has developed a relationship with Infineon for the supply of GSM/GPRS chipsets, and also to strengthen its in-house design capabilities. In 2002, Konka worked with an Infineon subsidiary, Danish Wireless Design, in designing the K5238 GSM handset. Konka was one of a group of Chinese handset makers that took licenses from Qualcomm in January 2002 allowing the company to design and manufacture CDMA handsets. Dragons at the Gates Portelligent, Inc. (2003) Page 28

29 With its broad presence in electronic appliances, Konka has one of the most recognized brands in the Chinese market among the Chinese handset makers. Web site: Dragons at the Gates Portelligent, Inc. (2003) Page 29

30 4.8 Legend Established in 1984, Legend first served as a distributor of computers for IBM and AST and of printers and peripherals for Hewlett Packard. Today, Legend is the leading domestic brand of personal computers in China, with market share of approximately 40 percent in the consumer PC market. In February 2002, Legend formed a handset manufacturing joint venture with a Chinese handset supplier, Xiamen Overseas Electronic Company (or, Xoceco). Legend initially held a 60-percent share in the venture, but later increased its stake to 80.8 percent. Legend seeks to leverage its brand name, deep pockets, and the capabilities of its partner Xoceco, to become one of the top three domestic cellular phone suppliers in China over the next three to five years. The company ramped up its R&D investments in mobile handsets and related technologies beginning in 2000, with particular emphasis on data transmission and information processing capabilities. In November 2002, Legend debuted its first color screen handset, the i188, which features a 128-by-144-pixel screen capable of displaying 65,536 colors and nine lines of Chinese text. In spring 2003, Legend announced six new models of cellular phones equipped with color displays. To be marketed under the new brand name Lenova, all are reported to be the result of internal development efforts. Three of the six models support MMS services. Web site: Panda The Panda Electronics Group was originally established in 1936, making it the grandfather among the group of Chinese handset makers covered in this study. The Nanjing-based company produces a broad line of home appliances and consumer electronics products such as TV sets, personal computers, DVD players, washing machines, rice cookers, and vacuum cleaners, in addition to cellular handsets. Panda sold about 700,000 self-branded handsets in The company has a goal of shipping 3-6 times more handsets in China in 2003 under its own brand. Panda operates two joint ventures with Ericsson, Nanjing Ericsson Panda Communications (a network communication system company that supplies wireless infrastructure in China) and Beijing Ericsson Mobile Communications (a handset manufacturing venture). Panda s Taiwanese OEM partners include Arima Communication and Compal Electronics. In addition, Sewon Telecom of South Korea has been reported in the trade press to have landed an order to produce 350,000 GSM handsets for Panda. Panda has worked with National Semiconductor in using the latter s GSM chipset in the design of Panda brand handsets. Web site: Soutec Located in the Guangzhou Science Park, the Guangzhou Soutec Technology Group Company (Soutec for short) was incorporated in May 1999 as a state-owned enterprise. The company specializes in wireless handsets and other portable telecommunication products. Soutec produces both GSM and CDMA handsets. Soutec has Motorola and Qualcomm as technology partners. It procures some handsets from BenQ of Taiwan, as well as from Pantech and Standard Telecom of South Korea. In advancing its capabilities to design handsets in-house, Soutec has worked with several Western firms. In 2001, for instance, Soutec became a customer of Wavecom, using Wavecom s Wismo module in GSM handsets. Also in 2001, Soutec applied Analog Devices Othello direct conversion radio chipset, SoftFone DSP baseband processor, and RF management devices in the design of its S600 Dragons at the Gates Portelligent, Inc. (2003) Page 30

31 handset. TTPCom. The S600 also incorporated software licensed from Web site: In addition to conventional cellular handsets, Soutec makes walkietalkies and terminals for hands-free communication in vehicles. Dragons at the Gates Portelligent, Inc. (2003) Page 31