No-frills phones gain ground in China
Keywords:cellphone? ultralow-cost handsets? ULCH?
The vision of a billion people equipped with cellphones is creeping toward reality in China, as the market for ultralow-cost handsets (ULCHs) begins to build unexpected momentum. The trend, if it fully unfolds, poses both promise and peril for cellphone chip suppliers, pitting those with a low-cost single-chip solution against those without one.
In theory, Infineon Technologies AG and Texas Instruments Inc. (TI), the two IC vendors that have led the way in developing one-chip products, stand to gain the most.
Other chip vendors are bypassing the opportunity, betting that low margins and what they perceive as limited growth prospects will cramp profits.
Originally, ULHC weren't expected to do that well in China. Motorola Inc. shunned promoting its ULCH platform there, choosing India instead as a main target and then moving to other developing markets, such as Africa. As recently as several months ago, some chipmakers believed that Chinese consumers wouldn't buy the no-frills models, preferring at least to have a color screen and perhaps a camera or MP3 capability.
But that outlook is changing as dirt-cheap handsets begin popping up in rural markets. "That's where a significant part of China Mobile's growth is coming from, so they are buying ULCHs for their sales channels and targeting advertising campaigns at poorer rural villages," said Ted Dean, an analyst at Beijing-based BDA China Ltd.
The first IC to market was Infineon's ULC1. That first-generation ultralow-cost single-chip solution, with a transceiver and a digital baseband in a single die, has been in volume production since January. Claiming that ULC1 reduces a handset's BOM to "significantly below $50," Horst Pratsch, VP for marketing of entry-level phones at Infineon, said, "we are seeing sales of our ULC1 picking up among OEMs and design houses in China."
China is the world's largest cellphone market, with more than 400 million subscribers, even though nearly 70 percent of the people don't own a handset. Now that top-tier and second-tier cities have been saturated, China's telcos are looking to grow in third-tier cities and the poorer countryside, where nearly 800 million Chinese live. In a sign of the rising importance of these regions, more than half of China Mobile's new subscribers in the first half of the year came from small cities, towns and villages, according to BDA.
That finding dovetails with predictions that ULCH shipments in China will soar this year to more than 1 million units, against only about 1,000 in 2005, according to iSuppli Corp. The research firm believes the market will expand to 14.7 million phones by 2010, accounting for 10 percent of China's domestic shipmentsup from 1 percent this year.
iSuppli analyst Kevin Wang believes China Mobile and rival China Unicom will "sharply" reduce their voice fees in certain areas to spur subscriber growth from the countryside. The operators have already spent more than $1.3 billion to expand their networks in rural regions. Meanwhile, the China government hopes to move closer to its goal of universal access to phone services by promoting a program called Village-to-Village Connection, which could also drive demand for cheap handsets.
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But Doug Grant, director of business development at Analog Devices Inc., isn't buying into predictions of huge growth for ULCHs in the China market. Boosters fail to fully appreciate the difficulty that people of modest means may have in paying a monthly wireless subscriber fee, even a discounted one, he noted.
Based on his reading of analyst reports and other data, Grant believes the market for ULCHs will never represent more than 10 percent of the overall handset market in China or worldwide. ULCH shipments may eventually reach 100 million to 150 million globally, he said, but are not likely to increase beyond that. Market research analysts IDC Corp. and ABI Research are projecting total global handset shipments will exceed 1 billion this year.
Nokia and Motorola are already well-positioned for the ULCH market, but local Chinese handset makers remain undecided about how aggressively to pursue it.
"For the domestic makers, if we put too many ULCHs into the market, consumers will have an impression of low price and low quality. People will think domestic-branded ULCHs are only used for low-status migrant workers," said Tong Ruixue, a marketing executive at TCL.
But Ningbo Bird, one of China's major domestic handset makers, said it will use Infineon's single-chip solution to penetrate the ULCH market. "A lot of consumers, such as college students, labor workers and farmers, don't have the budget to buy expensive cellphones, but they'd still like to have a phone. Low price doesn't mean bad functions. To them, voice and SMS are enough," said Bird's Chen Lixian.
ZTE Corp., Huawei and Haier are also pursuing the ultralow-cost phone market. Others, such as Amoi and Legend, are watching and waiting. For the moment, they will focus on increasing share in the entry-level market, where phones sell for $50 to $125.
TI platform
Both Nokia and Motorola are believed to have tapped Texas Instruments' Digital RF Processor (DRP) technology, which forms the heart of TI's single-chip ULCH solution. Nokia will use a custom version of DRP. Competing will remain tough for China companies, because Nokia and Motorola have the brand and distribution channels to drive volumes, said Victor Epifani, marketing director of TI's 2.5G business unit.
Epifani said he was "not completely convinced" of BDA's assertion that ULCHs are suddenly enjoying explosive growth. "It's a market that has been there, and we have been serving it," he said, adding that he has seen an uptick in adoption recently as prices have come down.
Infineon is optimistic about its single-chip solutions. The company already claims 10 design wins with its ULC1, mostly in China. In terms of integration, ULC1 is said to match TI's DRP. But while ULC1 is based on a 130nm process, TI has optimized the RF in its DRP for CMOS processes of 90nm and below.
Ultimately, some say, the fewer the players, the better. With very low margins and a relatively low projected growth ceiling, some believe it is unlikely that this market could support many vendors.
- Mike Clendenin and Dylan McGrath
EE Times
Cai Yan in Shanghai and Junko Yoshida in Paris contributed to this story.
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