For years China has been billed as the world’s manufacturing powerhouse but the nation’s massive manufacturing industry generates only thin margins due to its inability to turn out key components and parts

Lack of R&D means thin profits for China’s smartphone makers

2014-02-26

For years China has been billed as the world’s manufacturing powerhouse but the nation’s massive manufacturing industry generates only thin margins due to its inability to turn out key components and parts, as typified by the status of its mobile-phone industry.

China manufactures at least 60% of the world’s smartphones, which topped 1 billion handsets in 2013, but the industry still relies heavily on imports of chips, screens and other key components, according to Guangzhou’s South Reviews magazine. Due to the thin profit margins, Chinese smartphone manufacturers have been unable to invest heavily in R&D and accumulate technological know-how, which means they will inevitably run into difficulty once overseas demand slackens.

The owner of one company that claims to be a mobile-phone chip solution provider in Shenzhen, for example, is in truth an assembler of mobile phone main boards using imported chips and other components. The owner said that even cafes earn more of a profit margin than his company.

Shenzhen boasts the world’s largest production base and trading markets for mobile phones but local manufacturers rely entirely on chips provided by US firms Qualcomm and Texas Instruments, Dutch firm Philips, and Taiwan’s MediaTek.

The Shenzhen assembler reported that imported chips cost 150 yuan (US$24.50), 75% of the export price of 200 yuan (US$32.65) for an entry-level smartphone shipped to Africa, leaving only 50 yuan (US$8.16) to be shared by Chinese manufacturers at various stages of the production chain.

The CFO of a router manufacturer in Guangdong with an output that ranks among the world’s top 10 said that the company relies on chipsets supplied by US firms Broadcom and Atheros, which account for over 30% of the production costs, as well as imported heat-resistant materials, critical for the product which has to function around the clock, leaving the company only a thin margin.

Industry insiders noted that in addition to control of key components and parts, Western firms dominate in R&D, fortifying their dominant status on the global market with patented technology and further eroding the margin of Chinese manufacturers.

The owner of the aforementioned Shenzhen assembler said that Qualcomm sells patents as well as chips, collecting 3%-6% in patent-licensing fees on the sale price of Chinese “chip solution providers.” As a result, for a Chinese-made mobile phone priced at 2,000 yuan (US$327), Qualcomm may charge up to 120 yuan (US$19.60) in licensing fees.

Almost all leading Chinese mobile-phone manufacturers are customers of Qualcomm, together accounting for 30% of the global sales of Qualcomm chips.