China's emerging cities keep smartphone makers buzzing

Many Chinese smartphone vendors are more concerned over the transition from feature phones to smartphones, given that this usually means reduced manufacturing capacity and profits, than the presence of big brand vendors such as Samsung and Apple in the domestic market.
This is because much of the smartphone growth can be found among mobile users in the tier-3 to tier-6 cities in the country, and these are areas foreign brands have little to no presence in, according to industry insiders.
Nicole Peng, research director for China at analyst firm Canalys, told ZDNet Asia that consumers in the lower tier cities in China can easily go online to find information regarding the handsets they are eyeing via e-commerce sites such as Taobao or 360Buy. They are then exposed to foreign brand devices and have a means to purchase these handsets should they choose to, she noted.
However, the 3G penetration rate in China just reached 30 percent in 2012, which indicates that the growth ceiling is still quite high. In fact, Peng expects a large number of phone users will buy their first smartphone device this year and next and many of these consumers will be from the lower tier cities.   
"Some of them will look for high-end devices, but the majority will still look for devices that are 'value-for-money'," she noted, adding that quad-core, 4-inch screen smartphones from domestic brands are generally priced between 1,700 yuan (US$270.90) and 2,500 yuan (US$398.38). In contrast, a Samsung smartphone could cost from a few hundred yuan to thousands of yuan more, according to the company's Web site.
She added there are even cheaper alternatives ranging from 300 yuan (US$47.81) to 400 yuan (US$63.74), but these tend to be of poor quality and user experience.
The analyst is confident as component costs continue to decline--it has "dropped drastically" in the past year--and the technical capabilities of Chinese smartphone makers improve, a low retail price will not equate to compromised quality in the near future.
"Devices from the domestic brands can satisfy the mass market consumer needs," Peng stated.
Standing local phonemakers such as K-Touch, Gionee and Oppo in good stead too is their established relationships with channel partners and third-party retailers, she pointed out. These vendors' long-term relationship with retail channel partners helps them to understand the tier-3 to tier-6 markets very well and allow them to rapidly produce devices that can serve different consumer segments, the analyst explained.
Emerging cities main growth driver
The transition from manufacturing feature phones to smartphones has proved more painful for these local phonemakers than the competition from foreign brands though.
According to Edison Ho, client director at Beijing Tianyu Communication Equipment, which produces the K-Touch brand of smartphones, the quantity of handsets produced by the company fell when they made the transition in 2009. It was churning out 20 million feature phones per year before the transition, and this fell to 1 million per month in 2012 or 12 million for the whole year, he said.

While smartphones are generally more profitable, the initial outlay for improved materials, machinery and better-skilled staff mean most companies making the transition will suffer a hit to their profit margins, he added.
Ho did say the company was confident of its future amid the increased competition from foreign brands and local giants such as Huawei and ZTE as well as upstarts Xiaomi. This was because its strength was in the tier-2 to tier-4 markets, and these were underserved by the bigger brands as they did not have the channel partners to meet these consumer segments, he explained, echoing Peng's point.
PC maker Lenovo, which unveiled a slew of smartphones last week at the Consumer Electronics Show (CES) 2013, also highlighted the importance of its channel partnerships and ability to cater to the emerging lower tier cities in China as reasons why it will continue to grow its market presence locally.
JD Howard, vice president of business operations & worldwide business development at Lenovo's Mobile Internet and Digital Home (MIDH) business group, told ZDNet Asia during CES it will continue to cater to all market segments--from first-time bargain hunters to executives using the smartphone for work--as the Chinese smartphone market continues its "explosive growth" in 2013.
Its success will be determined by the company's better branding image and wider distribution networks, which are "second to none", added Christopher Millward, director of global communications at Lenovo's MIDH unit.
Looking ahead, Peng stated that as China's mobile industry undergoes a major transition in terms of channel and operator business models and consumer behavior, only vendors that can adapt to changes quickly will survive.
She added there will be less new companies rushing into the smartphone market and some existing feature phone vendors may even exit the market as the competition moves from just pricing to quality of the device.