China’s Cellphone Market

An article in the McKinsey Quarterly reinforces a point made in the Economist recently about the growing importance of ODMs (original design manufacturers):

The worlds biggest and best-known sellers of mobile telephones face cutthroat competition in China. The market share of local vendors, such as TCL and Ningbo Bird, has jumped from 5 percent of all units in 1999 to nearly 40 percent in 2003, with upward of 50 percent growth in 2003 alone (exhibit). These gains have come largely at the expense of multinational corporations. To slow the penetration of local players, a McKinsey study suggests, global branded handset makers should consider outsourcing the design of some products to original-design manufacturers (ODMs) in Taiwan and South Korea. In this way, foreign manufacturers could cut their costs, increase their revenues, and more quickly market the models that Chinese consumers really want.

In addition to designing products for other companies, ODMs frequently manufacture goods for customers that then affix their own brand names. This one-stop offering distinguishes such ODMs from electronics-manufacturing service companies such as Solectron and Flextronics, which either dont undertake design or have only started to build these capabilities. Global mobile-phone makers currently avail themselves of both kinds of outsourcers to varying degrees. While the use of ODMs may be relatively new for the mobile-handset industry, these companies currently manufacture more than half of all notebook computers in the world.

Many foreign handset manufacturers, relying largely on models they sell in other markets, have limited R&D staffs in China. This one-size-fits-all approach increasingly puts such companies at a disadvantage to local ones, which have their own R&D talent and can quickly design phones tailored to specific customer segments. In China, 60 percent of all handsets are “clamshell” units, for example, but many foreign producers dont offer this type of mobile phone, which isnt as popular in their home markets. Local manufacturers also have the specialized skills to design phones capable of entering thousands of different Chinese characters in text messages, even on small handsets. We found that ODMs can help global giants take on their local competitorsand improve their time to marketbecause ODMs are more familiar with the language and tastes of Chinese consumers and have the requisite engineering talent.

Although ODMs offer their clients marketing and cost advantages, they have their limitations. The mobile-handset industry uses several operating systems and central processing units. Since ODMs have to spread their design resources across a range of technologies, they cant be on the cutting edge in every facet of production. Furthermore, ODMs routinely serve competing global players, so ideas developed for one customer could be applied to the products of another. Thus foreign handset companies must choose carefully which parts of their Chinese product lines to outsource. They could benefit by continuing to design in-house the small but rapidly growing and profitable high-end segment, with models offering features such as video and electronic-payment systems.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.