Who will win the smartphone battle in China?

Arete Research
19 Mar 2012

While many OEMs are trying to become masters of China's smartphone realm, only Huawei looks certain of ascending the ranks, and no vendor will escape without incurring severe losses.

China's operators are playing an increasingly central role in the smartphone market: even without fully subsidizing handsets, Arete’s recent report describes how their vendor selections will drive the low-end (RMB1,000) segment this year.

Chinese vendors aim to find profit through scale, but privately acknowledge making money is not a priority for now. Arete sees structurally higher costs to build brand (which Chinese vendors may be naïve about), support rising working capital and wider distribution. But the biggest unknown cost is that of IP; a long list of Western companies (Microsoft, Nokia, Ericsson, etc.) is demanding hefty royalties, for which few provisions have been made. Vendors like ZTE face an additional $9-$10 per Android device in royalties.

Chinese vendors cannot lose money forever: Arete thinks some must find Western brands to partner in this year.

IP is a massive barrier for China vendors hoping to build export business; they need protection via Qualcomm’s pass-through-rights. This makes IP a critical difference in the battle between Qualcomm and MediaTek. Arete thinks MediaTek may need to start acquiring IP of its own to plug this gap.

It seems clear that the extra costs of trying to move up-market will bring deep losses to Chinese brands. This may make China a more attractive market for foreign brands like, Samsung, HTC, Nokia and Motorola by 2012, if they can

secure slots at operators and move to lower price points than in other developing markets. With sales of more than 100 million units in last year, end-demand is not a problem, but making money will be difficult.

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