It seems Western manufacturers of mobile communications devices, such as cellphones and handheld messaging communicators (such as RIM’s Blackberry), still haven’t come to grips with the challenges and vagaries of China’s technology marketplace.
A report by Reuters today illustrates the problem, suggesting that Western-made mobile devices remain too expensive for many Chinese consumers to buy and own. As a result, Chinese buyers are turning to refurbished cellphones, which are smuggled into the country, or to black-market devices manufactured by a growing number of rogue companies that find it surprisingly easy to obtain design blueprints and operational facilities.
In 2005, approximately 15 million black-market phone — sold cheaply, but with neither service nor support — were bought in China, compared to 80 million handsets sold through licensed dealers, according to Beijing-based research firm Marbridge Consulting. That meant 16 percent of handsets sold in China last year were made by unlicensed companies or smuggled into the country. That’s a mind-boggling percentage, and it could get higher before it begins to decline.
The problem results from a serious disconnect between licensed vendors, Chinese and Western alike, and a Chinese populace that is often unable, but sometimes also unwilling, to pay the relatively rich prices for cellphones and service plans that Westerners have come to tolerate.
The obvious answer is for licensed manufacturers to give the people what they want, designing simpler handsets from fewer components and at lower costs. That would result in a new range of affordable handsets from licensed, reputable sources. They might not quite match the low prices of smuggled or knocked-off products, but they probably would be sold at low-enough prices to draw greater numbers of Chinese consumers to legitimate offerings, replete with the comfort of service and support provisions that do not accompany black-market handsets.
It’s really the only option the major handset players have at their disposal. The Chinese government doesn’t severely punish the unlicensed manufacturers, despite the remonstration of foreign and Chinese licensed vendors.
Although the Chinese authorities would never say so publicly, the reason they don’t come down harder on the rogue manufacturers is that they want the Chinese people to adopt new communications and computing technologies. It’s all part of moving the nation forward socioeconomically. The authorities understand, however, that many licensed handsets are beyond the budgetary boundaries of Chinese buyers.
Since the Chinese authorities would rather see people have and use handsets than not use them at all, they tolerate the scofflaws that build unlicensed products. Of course, those unlicensed manufacturers also provide jobs, which is considered another countervailing positive factor by China’s technocrats.
It’s worth watching how well the world’s leading handset and mobile-device vendors adapt to the challenges China has placed before them. How well can Motorola, Nokia, Sony-Ericsson, and even some of the home-grown licensed Chinese players adjust to the black-market threat? Can they do enough to cut into the significant market share that rogue or smuggled devices have taken, or will the illicit products claim increased share?
These are not academic questions. The answers to them will play meaningful roles in determining how much the major handset manufacturers will grow their businesses in the years ahead.
Nearly all of them entered the Chinese market with great hope and big aspirations, which they were not reluctant to share with market analysts, business journalists, and shareholders. The reality of doing business there has been a quite different experience, and the vendors that learn from that experience will come closest to justifying their early optimism about what China would mean for their businesses.