Chinese companies look to cheaper end but suffer lower profit margins

Chinese smartphone manufacturers are taking more than half of the market share in China but find it hard to increase their profit margins, while the entry of newcomers will make competition more intense, industry insiders said.

In April, four out of the top five best-selling mobile devices in China were manufactured by indigenous Chinese companies, data from Sino Market Research Ltd showed. The top four local brands took more than 40 percent of the total sales volume in the market.

South Korean electronics maker Samsung Electronic Co's smartphones topped the best-selling list in April in the nation, selling more than 2 million smartphones, data from Sino showed.

"Chinese smartphone makers have managed to dominate the low- and middle-end market over the past several years but large numbers of buyers are price-sensitive and only willing to spend a little money in purchasing mobile phones," said Henry Lin, chairman and co-chief executive officer of NQ Mobile Inc, the world's largest mobile security provider.

Only a few Chinese smartphone makers are in the high-end market. Lower priced cellphones usually have narrow profit margins.

"Apple Inc took only about 2 percent of the market share in the smartphone market but it took more than 80 percent of the profits," said Lin,

He added that high-end cellphone makers are willing to pay a higher cost in boosting innovation and user experience because their customers are expecting the best product performance.

The profit statement for the smartphone industry shows a more difficult situation for Chinese makers. Samsung and Apple Inc's products hold 99 percent of the profit, while local brands have to compete with other overseas manufacturers for the remaining 1 percent of profit, Southern Metropolis Daily reported, citing research released by Huabao Securities Co.

Battlefield

Moreover, overseas cellphone giants are targeting the Chinese market as the nation's smartphone penetration rate remains at about 10 percent.

In March, Nokia Corp introduced its first phone that runs on Microsoft Inc's Windows Phone operating system to the Chinese market. The move was believed to be a signal that the Finnish cellphone maker was trying to maintain its hold in the country's mobile phone market.

"The only way to change the situation in the Chinese market is to introduce more great products," said Stephen Elop, chief executive officer of Nokia.

Most of the local brands are focusing on producing lower-price devices - costing about 1,000 yuan ($159) each. Sales were boosted by contract phones. High-end cellphone makers are concentrating on lifting user experience because their customers seem to worry less about the price of the product.

"China has great potential for generating about 1 billion smartphone users over the next several years," said Lin, adding that one user will have more than one device at the same time, creating an even larger market for mobile device makers.

High-end brand makers seem to find it easier to sell their devices in China.

In April, China's smartphone maker Xiaomi Corp sold 150,000 phones in just 12 minutes as it launched the seventh round of an online sale.

The company makes high-end performing smartphones at affordable prices.

The company's phones are priced at 2,000 yuan. More than 1.65 million units had been sold by April since its debut in late October 2011, said a Xiaomi spokesman.

A number of Chinese Internet companies started to go mobile this year, their first incursion into the smartphone market.

In May, the Chinese Web search engine Baidu Inc teamed up with Sichuan Changhong Electric Co, China's home appliance maker, to promote low-end smartphones. The model was sold for less than 900 yuan.

The e-commerce giant Alibaba Group Holding Ltd introduced its first smartphone based on a self-developed operating system this month. The price of the new gadget was priced at 999 yuan, the same as a bluetooth earphone for an iPhone.

On the same day, Shanda Interactive Entertainment Ltd, an Internet-based IT firm, also released a slightly higher priced smartphone, Bambook. The highest priced for the device is 1,499 yuan, enough to buy two Samsung Galaxy SII phones.

Qihoo 360 Technology Co, an Internet security company, also announced it would enter the mobile phone market this year.

Despite the growing competition, industry insiders believe there is still a lot of room for newcomers as the market remains young and heavily relies on the development of the mobile Internet, an even younger industry.

"The silver bullet for Chinese competitors to survive is to find a segment of the market and make specialized devices for that particular sector," said Lin.

Contact the writer at [email protected]