The boom in mobile phone use in China continues unabated. The number of mobile users in China is now approaching the 200 million mark as China continues to add approximately 5 million new mobile users per month. In developed urban areas such as Shenzhen, the rate of mobile penetration now exceeds that of fixed line penetration, and mobile users are expected to outnumber fixed-line users by mid-2003.

As SMS and mobile data take off, Chinese users are beginning to look at their handsets as well as talk into them. 16 billion SMS messages were passed in China the first half of the year, and full year SMS targets stand at 60 billion SMS messages.

In terms of network technology, Japan and Korea, which have both launched 3G services, are the global leaders, but China is just one step behind. In May 2002, China Mobile, which operates a GSM network with approximately 3/4 of China’s mobile subscribers, officially launched nationwide 2.5G GPRS services covering 138 cities. China Unicom, on the other hand, has clearly stated its intention to pin its future development on its new CDMA network, referred to as “133 wang” or “the 133 network” because its CDMA phone numbers begin with the 133 prefix. Unicom launched the network in January, but had only about 1 million CDMA subscribers by mid-year.

In mid-2002, Unicom began launching promotional CDMA packages that include free CDMA phones and/or free minutes of use. The market response has been strong. Unicom may reach its original target to gain 7 million CDMA users by the end of December. But users still complain that 133 coverage remains spotty. Unicom plans to launch 2.5G CDMA1X services in early 2003. Unicom’s 1X network is now operating within Beijing’s second ring road, where users can enjoy free data services with speeds that far outdo GPRS. China Mobile sees the launch of Unicom’s 1X network as a threat to its past leadership in the market.

Mobile Handset Sales and Market Share

Given the global slump in telecoms, China’s growing handset market has been one of the industry’s few bright spots, as Chinese consumers continue to browse retail shops for the latest models and prices. In the first half of 2002, total GSM handset sales in the Mainland reached 24.8 million units, slightly off the pace of last year’s full-year total of 50.2 million GSM handset sales. The 1H 2002 handset market was good for Motorola, but a disappointment for European handset makers. Samsung and domestic makers such as TCL and Amoisonic put in stellar performances that look set to continue.

Motorola and Nokia continue to dominate the China GSM handset market with Motorola holding a slight lead and maintaining market share in line with its 2001 performance. Nokia shows signs of weakening, giving up market share to surging domestic makers and to a rising Samsung. Nokia continues to stick to a standard European design that lacks freshness in the market. While hoping their new camera phone will be a hit with shutter-happy Chinese, initial consumer reaction calls the phones bulky.

In 1H 2002, Ericsson fell hardest, attaining less than 10% of last year’s sales in the period. Ericsson has at last re-emerged in China under the Sony-Ericsson brand, but the verdict is still out on sales of the MMS-enabled model.

Among foreign handset manufacturers, Samsung continues to make inroads into the market, raising the quality of its brand image and winning high-end users for its clamshell models through its “Asian” design sensibility.

The Rising Domestic Handset Makers

1H 2002 sales by domestic producers surged 30% over the same period last year, with TCL and Xiamen-based Amoisonic showing the most dramatic rises. China’s new mobile users tend to be cost-conscious and located in second- and third-tier cities – areas not yet penetrated by distributors of higher-cost foreign handset models. In many outlying areas, the TCL brand name is reportedly more closely associated with handsets than the names of Motorola and Nokia, which tend to focus marketing activities on developed urban areas.

Working to become the “Rolex” of mobile phones, TCL has launched a series of diamond-studded handsets that have been a major hit in the market. TCL even distributes its high-end phones through jewelry retailers. The fashion function of phones in China is quickly overtaking the communication function.

Market share for domestic makers may climb as high as 30% in 2002 – a stronger rise than industry-watchers predicted. Domestics are honing their design skills, strengthening their marketing coverage, and beginning to compete relentlessly on price.

As surging growth in mobile users extends out into the provinces, China’s handset market is in a period of rapid transition that favors the rise of domestic makers. After 5 years of largely Western domination, an Asian clamshell handset design style with roots in Korea and Japan is emerging to win the China market. As room for growth against established foreign brands evaporates, competition among domestics will turn white hot.