TD-LTE: There was a good deal of scepticism

Hard to believe now, but it wasn't long ago when the mobile world was dubious about TD-LTE

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Handset sales drove Huawei’s big 1H

About that robust Huawei 1H result: it’s mostly about the device.

After the vendor yesterday reported a 30% boost in first-half sales to 175.9 billion yuan ($28.3 billion), the consumer group today issued its own mini-statement. 

Like the company, it’s on a considerable roll, only more so. Revenue for the division increased a hefty 69% year-on-year to 56.3b yuan. It now accounts for 32% of the total, up from 24% this time last year.

Devices have become a big part of Huawei, and perhaps never more so in this period. Of the 40.1b yuan extra topline revenue, almost three-fifths came from the device team. While that includes tablets, wearable and smart home gear, smartphones are far and away the biggest part. Smartphone revenue rose 87% to 44.9b yuan, which the company attributed to a “focus on mid to high-end handsets.”

Unit numbers are impressive, too, with shipments up 39%. Huawei had an 8.8% market share in April, according to Gfk, while Gartner ranked it fourth in Q1 behind Samsung, Lenovo and Apple.

Perhaps the big message here is not just the financials but that Huawei has now become a smartphone as well as a carrier equipment heavyweight. Handset quality, like market share, has been building since it decided four years ago to go after the device market.

So is the brand. In a media briefing Huawei reminds that last year it became the first ever Chinese brand on the Interbrand top 100, and it ranks 79th on the BrandZ chart of valuable brands.

The device group is well ahead of its $16b revenue target for 2015. It's now aiming for $20b.

China handset firms accuse Qualcomm

Chinese handset-makers have told a government inquiry that Qualcomm is charging them up to ten times more for its technologies than other foreign firms.

In a submission to the anti-monopoly probe into the US chip firm, an industry group, Mobile China Alliance,  says Qualcomm's high licence fees have had a “serious impact” on the domestic industry, Shanghai newspaper China Business News reports.

However, the group admits that even if Qualcomm cut its technology licence charges as a result of the investigation, the members are unlikely to benefit because of the intense competition between them.

MCA was set up under the government-backed China Communications Industry Association 15 months ago. Its members include handset-makers such as Lenovo, ZTE and Coolpad and chip firms like Spreadtrum. It said it had interviewed more than 20 companies for the report, which it filed with the National Development and Reform Commission (NDRC) on Sunday.

The NDRC began an inquiry into Qualcomm under China’s anti-monopoly law in November. An adverse finding could mean a penalty of as much as $1.2 billion.

The China Business News report says the NDRC investigation has three purposes:

...first, [the NDRC] probably hopes Qualcomm will reduce its licence fees for LTE chipsets; second, most likely to protect domestic businesses; and third it proceeds from national security considerations.

It says Qualcomm is planning to charge Chinese firms 4% of the retail price for use of its LTE technologies.

Yet although MCA chief Wang Yanhui says the Qualcomm inquiry is a "good thing", his members are not greatly enthusiastic about it.

"China handset vendor competition is very fierce. Even if Qualcomm reduce its prices, they still won't be able to easily grow their profit space."

Update: An earlier version of this post quoted a Beijing Daily News story which wrongly reported that Qualcomm had made a formal offer to the NDRC to drop the inquiry.  In fact, it was InterDigital which had made the submission to the NDRC. Beijing Daily News had inaccurately interpreted its name. 

China spends more on importing chips than oil

China spends a lot more on importing chips than oil.  According to iSuppli, China last year imported $192 billion in integrated chips and a mere $120 billion in oil.

This matters in China - and in the telecom sector in particular - because despite tipping all of that cash into semiconductor industry's pockets, domestic handset firms are well back in the queue for the Qualcomm and ARM chips that power top-range devices.

More than half of China Mobile’s recent TD-LTE handset tender went to devices using Qualcomm chips. Among Chinese firms, only Huawei's Hisilicon chip unit won a share.

A paper by State Council Research Office a month ago said 80% of China’s chips come from abroad, China Business News reports.  A touch sourly, the report notes that:

China in one year produces 1.18b handsets, 350m computers and 130m colour TVs - all no. 1 worldwide. But the high-end patent fees embedded in these reduces all of us to manual workers for the international vendors.

In truth China industry lacks the scale as well as the expertise of the big US, Korean and Taiwan chip players.

iSuppli senior semiconductor analyst Vincent Gu points out to China Business News that Taiwan fab TSMC has annual sales of $10 billion, greater than China's top four companies combined. TSMC and Intel are investing $10b each year, and China just $400-$500m.

In this thoughtful blog on the topic, Dieter Ernst, a senior fellow at the East-West Center, says the gap between China’s chip consumption and production grew from $5.7b in 1999 to $100.5b in 2011, aided in particular in the last few years by steepling imports of advanced wireless chips. He writes:

China remains way behind the technology frontier in both fabrication and design, reflected in a weak portfolio of essential semiconductor patents. China still has a long way to go before it can shape, or even co-shape, the industry’s technology trajectory.

One reason is that while China is deeply integrated into the global semiconductor production chain, “China’s leadership views such deep global integration primarily as a threat to its domestic innovation capacity, rather than an opportunity.”

Additionally, the sector is caught between by two disconnected drivers - the government’s indigenous innovation policy and the industry’s own real-world practice of global technology sourcing.

The result is “a fragmented innovation system that is ill-equipped” to respond to the challenges of the global value chain.

From the shards of the shanzhai, the rise of China handsets

Good times for China’s handset sector: the latest is that four of the top five brands in Asia-Pacific markets are Chinese.

But the counterpoint to the emergence of players such as Huawei, Lenovo and Coolpad is the demise of the pirate, or shanzhai market.

The shanzhai era now looks like a classic transition period in an emerging economy. A tiny number of shanzhai players are growing into genuine brands. The vast majority are gone or fast disappearing.

A report by Sohu IT recently found that of an estimated 6,000 or so vendors at the market peak seven years ago, only a few hundred are left.

What’s most interesting is the reasons cited - such as declining price of mid-range phones, greater enforcement of copyright laws and changing consumer tastes. In various ways these all connect back to the growing success of the genuine brands.

What appears to have sparked the almost total collapse of the market was a credit squeeze in the supply chain early this year.

Shanzhai handsets emerged in the mid-2000s. By making use of the extensive electronics supply chain in Guangdong, shanzhai firms could make fake versions of brand name phones for as little 100 yuan.

When Sohu IT reporters paid a visit to Huaqiang North Rd, or 'Electronics St', in Shenzhen, they found just the shards of the shanzhai trade.

Of the five once-thriving retail malls, only one remains, Mingtong Digital City, now barely covering a single floor. Where it once charged 100,000 yuan a month in rent, stallholders today pay just 3000 yuan.

According to Sohu, the crisis began at the start of the year, when sales fell off a cliff and returns began piling up, creating a cash crunch in the supply chain. 

These firms weren't flush to start with. Typically, a shanzhai business could start up with just 600,000 yuan ($9,800). It had to pay cash for the Mediatek chipset, the camera lens and the display, but everything else came on credit. Now the battery, mould and packaging firms all require upfront payment.

The result, according to a manager of one store, is that as many as 800 bosses of knockoff firms are doing a runner each month.

The biggest factor is probably price. Shanzhai phones are caught in a pincer. On the one side, mid-range Samsung phones have come down in price and are now available for 2000 yuan or so. From the other side, local brands like Huawei and ZTE are cutting their own prices.

Another is the limitations of the shanzhai firms themselves – the shoddy quality and limited warranties, the inability build a brand or establish an online presence.

Then there's the increased vigilance of brand owners and authorities, both in China and abroad.

Consumer tastes are changing, too. Shanzhai sales in third tier Chinese cities, which were the biggest source of domestic demand, have plunged and these markets are now dominated by emerging Chinese brands like Gionee.

Of course, the arrival of the smartphone, and in particular Android, has been disruptive simply because of the degree of difficulty in developing them compared to feature phones.

Finally, there’s the safety issue. Apart from being unable to supply SAR measurement, there’s the sheer physical danger of shanzhai equipment.