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October 18, 2005 6:04 pm

International competition proves tough

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On the wall of Dopod Communications’ Shanghai office hangs a large poster from the martial arts epic Hero that the three-year-old Chinese smartphone company used for an early promotional campaign.

The unlikely pairing appears oddly appropriate. Like scores of other Chinese mobile phone handset companies, Dopod must compete against powerful international rivals such as Nokia and Motorola. But unlike most of its domestic peers, Dopod appears to be holding its own.

“Chinese mobile phone manufacturers are almost all losing money, except Dopod,” says company president and chief executive, Charles Yang. “Dopod is making good profits.”

Dopod’s success in handsets and the problems of its local rivals offer potentially important insights into the battle between domestic and foreign companies for control of China’s IT markets.

International vendors such as Motorola and Nokia once enjoyed such comfortable dominance of handset sales that they were taken completely by surprise when a raft of local brands suddenly emerged in 1999.

The local brands, led by electronics manufacturers Ningbo Bird and TCL, won half the market by 2003 by offering products designed for local tastes, launching clever marketing campaigns and building distribution channels far beyond the cities of China’s affluent east.

The speed of their success was widely seen as demonstrating the vulnerability of big IT companies to challenge from upstart Chinese rivals – a challenge likely to be soon repeated overseas.

But the ascendancy of the local vendors masked weaknesses. Many relied heavily on contract manufacturers to build and often design their products.

Lack of production scale and inventory control made it difficult to compete on cost with multinationals who already make many of their phones in China. Tight margins meant it was hard to invest in the new technology needed to attract high-end buyers.

When international players refocused on China, local brands quickly found it much harder to compete. Nokia in particular moved quickly to tailor its phones by introducing “clamshell” designs and localised handwriting recognition. And it has built a national distribution network that sells phones more effectively into third- and fourth-tier cities.

“The Chinese brands have weakened considerably. We’ve been able to copy all the distribution methods that they used,” says Colin Giles, head of Nokia’s mobile phone business in China. “This year, we have been seeing month-on-month gains at the expense of local producers.”

David Ho, Nokia’s country president, says local rivals’ lack of resources has been key to the company’s resurgence. “They don’t spend enough on R&D,” he says. “That’s why we came back in a year.”

The Finnish giant’s efforts have made it China’s leading handset supplier. Local brands face further pressure from former market leader Motorola, which is also planning to expand its distribution reach and launch more China-tailored phones.

The stronger local companies such as Ningbo Bird, TCL and Amoi appear likely to endure and the network clout of telecom equipment producers Huawei and ZTE maks them contenders. But analysts now doubt the survival of many of the rest of China’s handset vendors.

So why is Dopod, which was established only in 2002, looking so cheerful?

While others cut back on advertising, Dopod’s name seems to be everywhere – and while rivals struggle to maintain margins on mass market products, Dopod has carved out a niche with an up-market range of phones priced up to $1,000.

Such success is the result of a focus on the premium business and a series of clever alliances. Much of Dopod’s manufacturing is done by Taiwanese shareholder HTC, one of the world’s leading high-end handset producers.

To gain access to a licence to sell handsets in China, Dopod had to take state-owned electronics group CEC as a shareholder, but one that can be bought out later. Dopod has won the potent friendship of Microsoft by adopting the mobile version of Windows, which is largely shunned by big handset vendors.

But Dopod’s most important ally has proved to be China Mobile, the dominant wireless operator, which offers its handsets at subsidised prices or even free to high-end contract customers.

Such alliances have allowed Dopod to establish itself, but they also mean it is reliant on the good will of its partners.

Mr Yang, however, says Dopod is already looking beyond handsets sales for future growth. The real opportunities will lie in subscription-based content services offered over wireless networks, for which Dopod’s affluent customers should be a strong source of demand.

Creating such a business will be a challenge, even for a former engineer who worked on spacecraft engines for Ronald Reagan’s Star Wars programme during two decades in the US.

As Mr Yang is surely aware, the kung fu masters who tried to topple a mighty emperor in Hero fought valiantly and well. But they were all dead by the end of the film, nonetheless.

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