Market niches, supply chains transform mobile phone industry

2004 is looking like a record year for mobile phone sales, but changing dynamics pose multiple challenges.

Mobile phone manufacturers will ship an estimated 585 million handsets this year, 13% more than in 2003, according to market watcher Strategy Analytics (Boston, MA). Despite such attractive growth, lower entry barriers, fast-changing consumer preferences, and market convergence have transformed the mobile phone sector into an ultra-competitive market with more players than ever. Today, the key to market success is creating standout designs that successfully integrate the most appealing functionalities of computer and consumer electronic products for targeted market niches.

Not so long ago, creating a mobile phone was so tricky that it was the exclusive domain of a handful of specialist firms. It called for expertise in diverse areas from radio chip design to enclosure styling. Players also needed to maintain large, efficient manufacturing operations as well as the capability to supply even more complex base stations.

In recent years, however, much of the handset hardware and software has been commoditized and is available off the shelf—and production can be outsourced to electronic manufacturing service (EMS) firms like Flextronics (Singapore). Design can be outsourced to specialist design houses, or to firms known as original design manufacturers (ODMs), which, as the name implies, offer both design and production services.

The end result is that consumer electronics firms and startups have entered the fray, while some ODMs have even started producing their own brands. Leading ODMs include Taiwanese firms BenQ (the largest, with 15 million units capacity), Arima, Compal, HTC, and Quanta, all of which started out as notebook computer contract manufacturers.

Traditional suppliers such as Motorola and Nokia are increasingly turning to ODMs to reduce risk, as well as beef up their product portfolios. Jonas Twingler, COO at consultant Northstream AB, Stockholm, forecasts ODMs will account for 40% of handset production in 2005 versus 10% in 2002. This poses interesting challenges for plastics processors, according to Twingler. "Many ODMs are not only in the handset business," he notes. Processors with molding expertise in other product areas such as notebook computers would thus be at an advantage. Twingler also feels larger ODMs may take on more risk in order to win business by agreeing to forgo firmly guaranteed volumes, for example. Processors might also be called upon to share some of the risk.

With these developments, the mobile phone industry has moved from a vertical integration model to an outsourcing model, much like the auto industry. Similar transitions occurred in the computer and TV industries. Another similarity to the auto industry is the use of common platforms. ODMs in particular use standard components to reduce production costs, designing custom enclosures around them.

Is it a mobile phone?

Form follows function is the oldest adage of design, and nowhere is this becoming more evident than in the mobile phone industry. The phenomenon is best exemplified in phones boasting gaming and personal organizer functions—large screens that may be touch sensitive, and sometimes unique arrays of buttons.

Roughly 65 million ''camera phones'' will be sold this year, according to IDC (Framington, MA), and global sales are expected to reach 125 million units in 2005. Accordingly, some models are starting to resemble consumer digital cameras. The latest incorporate flashes, zoom lenses, and megapixel resolution on a par with conventional digital cameras.

Korean firm Hyundai Pantech (Seoul), for example, offers a phone that at first looks like a camera, but folds out from a clamshell design to appear more like a conventional phone, prompting the question, "what is it really?"

"It depends what market you are targeting," says Jay Li, Director of Industrial Design at Cellon International (Shenzhen). Whereas in the past one size might have fit all, the emergence of the mobile phone as ''the'' fashion statement has fractured the market into many small segments, particularly in China, where 500 models are released annually.

Li says mobile phone makers in China even design products specifically targeted at pre-teen children, or male business travelers. A case in point—the no-frills Philips Xenium 9@9++, designed by Cellon specifically for road warriors, boasts a standby time of one month and a design Li describes as powerful and masculine. "Although it only targeted 1% of the Chinese market, it has captured an 80% share of its niche," says Li.

The 9@9++ employs a monochrome display to reduce power consumption; but as phones incorporate more computer-like functions such as organizers and e-mail, color screens are making rapid inroads. Market researcher iSuppli Corp. (El Segundo, CA) forecasts color screen penetration will grow from 43% in 2003 to 67% this year, and 93% by 2008.

Color screens and more functions increase electronic complexity, and this means more connectors are required to hook up the components. Akihiro Miyachi, assistant manager at Molex Japan (Yamato), says large color screens and built-in cameras require advanced fine-pitch connectors that currently can only be made in Japan. Molex and other suppliers, such has Hirose Electric Co. and Japan Aviation Electronics Industry Ltd. (both Tokyo), ship products such as .5-mm pitch, .9-mm high LCP connectors for linking LCDs to flexible printed circuit boards.

Modular molds cut costs

The pressures of cost reduction and contracted time-to-market are compelling processor Perlos Corp. (Vantaa, Finland), a major supplier of injection molded components and assemblies for mobile phones, to refine its manufacturing strategy. In 2003, the firm used more than 800 molds on its production lines. In the future, the trend will be towards modular molds with core inserts. This will also enable easier modifications if a poorly selling phone is brought back for a minor facelift.

Perlos has tripled its team of designers to nearly 60 to better support design-for-manufacturability while mobile phone designs are still in the conceptual phase. "Previously, our customers wished to attend to the entire product design process on their own, from beginning to end. [Now], industrial design and brand management are still in their hands, but the responsibility for product manufacture has been transferred to us at an even earlier stage," says Jari Varjotie, VP in charge of product design in Perlos'' telecommunications and electronics business sector. The company aims to increase the number of designers to about 100 in 2005.

China Gears Up

As with many other electronic products, China is emerging as the leading global center for handset production. B2B firm Global Sources (New York) estimates China will export more than 100 million handsets this year, up from 90 million in 2003. The local market is also massive, with sales of 82 million handsets projected this year by CCID Consulting (Beijing). iSuppli, meanwhile, forecasts Chinese handset production to grow from 182 million in 2004 (32% of global production) to 231 million in 2008 (34%).

With this outlook, it''s no wonder market players, both local and foreign, are committing investment to the Mainland. Foreign mobile phone suppliers traditionally dominated the market; but in recent years, with entry barriers lowered, local players have captured an increasing share. There are already 37 local phone brands on the market with more on the way, and their share is forecast to grow from slightly less than 40% in 2003 to more than 50% by 2005, according to iSuppli.

Siemens AG (Munich) is one global firm augmenting its presence in China. The firm is boosting production capacity in Shanghai to 20 million handsets this year from the current 14 million. It has also announced plans for a joint venture with local handset maker Ningbo Bird (Zhejiang Province) to develop and market phones.

Local player TCL Corp. (Huizhou) recently tripled capacity to 42 million handsets a year, prompting fears that weaker players could soon be forced out of business. Moreover, Alcatel (Paris) recently announced plans to set up a joint venture with TCL, into which Alcatel would spin off its handset business.

Processors are also gearing up for increased demand in China. Perlos inaugurated its Beijing plant in November 2003, almost doubling capacity in the process. The firm started its first operation in China in 2001 in Guangzhou.

Another telecom processor, Balda AG (Bad Oeynhausen), recently acquired the 50% stake of its partner, Mikron Holding AG, in their Suzhou-based joint venture near Shanghai. The relationship was initially set up in April 2001 to serve the mobile phone sector.

Then in April, Everskill Technology Co. (Taipei Hsien, Taiwan) acquired a 25% stake in the operation, further augmenting Everskill''s presence in China—it already has plants in Kunshan and Shunde. Everskill''s owners include Compal Electronics, Asustek Computer, and Quanta Computer, all of which have plans to start mobile phone production.

More design work is also shifting to China to take advantage of its low cost structure and market potential. TechFaith Holding Ltd. (Beijing) and Japan''s NEC Corp. (Tokyo) formed a joint venture to design and develop 2.5G and 3G handsets. This is yet another indication that, as with many manufacturing industries, a prominent presence in China is fast becoming a prerequisite to global business. SM

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