China's handset biz: 2000 firms, 1% margins

China has 2,000 handset-makers, most barely meeting their costs, and yet still they come.

Chinese mobile phone manufacturers last year built 1.13 billion devices, of which 880 million were exported. That compares with just 8.0 million devices shipped in 2001.

For most the business returned a profit of less than 1%, according to this Guangzhou Daily story (via Sina). TCL Communications, one of the biggest China device players, last week reported its first quarterly loss for five years.

Over-supply isn’t exactly deterring new entrants. In the first half, the number of exporters rose from 480 to above 560, mostly low-tech players. 

MIIT figures say that most exporters at best earned their assembly cost, but “hot money continues to pour in from all directions” – PC, home appliance, sound equipment firms, and even coal miners have invested into the sector. 

A lot of newcomers don't set up any operations at all. They search out buyers in the channel and then get devices assembled, badged and shipped. Invevitably, the price wars are fierce: the margin for a feature phone is now as low as 2.5 yuan (40 cents), and some smartphones are selling at just a 10 yuan ($1.60) margin.

The story cites one Wu Quan, a metals trader, who borrowed 3m yuan ($480,000) from his father and went south to Shenzhen to join the handset business. He exited after two years of "suffering."

Industry insiders point out the business has changed since the halcyon shanzhai days of the 2000s. Now it’s all about smartphones and software, not just the hardware.

They call for a new approach and new business model that involves investment in good products and management. Surprisingly they're not callingfor people to get out of the market or (even more unusual) for the government to step in and clean it up.