An amazing proportion of cellular equipment was, until recently, made in the western world. My (admittedly old) Nokia handset is festooned with “Made in Finland” stickers; and much of cellular equipment manufacture through the late 1990s and early 2000s could be found in such places as Dallas, Ireland, Swindon, and Surrey in the UK. This “first wave” of manufacture kept the production facilities close to the R&D laboratories.
The migration began at the turn of the millennium when the cost base in Taiwan and China became too attractive to ignore. This “second wave” was accelerated by the slowdown in the telecommunications industry. Handset and infrastructure vendors sold off their production facilities to contract manufacturers, which by and large shipped production off to their existing lines in China.
The “third wave” is here now. It’s the (relatively) timid entry of Chinese or Taiwanese manufacturers as original design manufacturers (ODMs) - companies which design and build their own handsets but brand them with the name of an original equipment manufacturer (OEM). So, for example, a Motorola handset might be designed, built and shipped by BenQ of Taiwan but branded Motorola. This new approach has been highly successful in the GSM market, with some estimates putting 40 per cent of GSM handsets on sale as being produced by ODMs. Its success comes from the low cost base and wafer-thin margins that Chinese manufacturers can sustain, and the still reasonable average selling prices which GSM vendors can command in the Western marketplace.
The “fourth wave” will see Chinese manufacturers really flexing their muscles - but in different ways for the handset and infrastructure market. The fourth wave will have three main characteristics:
■ 3G Chinese OEM handsets based around Western companies’ reference designs
■ 3G base stations exploiting the fruits of massive Chinese R&D to offer winning price/performance ratios
■ The growing recognition of Chinese manufacturers as a brand in themselves as they build an understanding of Western design and specification trends.
The future is reference designs
Silicon vendors have in the last few years got wise to the idea of the “reference design” - a “design-in-a-box” including detailed descriptions of component lists and PCB layouts etc - which can be turned into a real product rapidly. With a reference design everybody wins: the silicon vendor ships more chips; the handset vendor gets to market faster; and the end customer gets a reliable product.
Reference designs have really taken off in the GSM handset market where the level of integration means that the handset contains only four or five key components (digital chips, radio chip, power amplifier and protocol software). A handset vendor purchasing a reference design can be rolling handsets off the line within a year.
Today, few handset manufacturers work outside the reference design model. Even the market leaders - Nokia, Siemens and Sony Ericsson - use reference designs, but with a few “tweaks”, customisation giving them best-in-class power consumption, features or price.
It took ten years of GSM development before credible reference designs started to appear on the market. It is likely that 3G will move to this phase in three or four years - and more importantly, the reference designs will cover the base station as well as the handset.
Silicon vendors are still struggling to make 3G silicon work at a reasonable power consumption and price point. It’s hard for them to offer a reference design when their own solution is unstable and rapidly evolving. But they will get there, and 3G handset reference designs should start appearing in 2005.
It is also unlikely that the Chinese manufacturers will develop their own 3G chips or reference designs: why bother, when the products from EMP, Freescale or Qualcomm are so capable? But they will incorporate them into their own designs at costs which Western manufacturers will struggle to match.
Base stations: massive R&D is now paying dividends
Chinese expertise in cellular - and especially in 3G - has grown rapidly through state-sponsored R&D; collaboration with Western manufacturers; and by learning from the contract manufacturer experience.
The Chinese manufacturers are committed, skilled and well funded. Their only Achilles heel is their lack of experience. For example, whole R&D centres are being set up and resourced with very little expertise and experience in the development of telecoms equipment.
That said, at recent trade shows, the displays by Chinese base station manufacturers like Huawei and ZTE have been startling. The products look good, they are “here today” and prices look attractive.
Brand building is going on now
In handsets, it used to be thought that “brand is all” and the marketing budgets of major players such as Nokia and Siemens were deployed to support the brand accordingly. Today it’s not so clear. The success of relatively low profile handsets such as Sharp’s Vodafone Live! product and NEC’s e series 3G handsets is part of a recognition that brand is only part of the story: price and bundling matter are equally key factors.
Operators’ craving for low-cost 3G handsets will push Chinese vendors into the limelight much more than in the past, allowing them to sidestep their current low-margin business and enter the mainstream OEM model.
In infrastructure, brand matters not one jot if the product doesn’t perform. Operators want quality product, and in 3G they want it at rock-bottom prices. Huawei, ZTE and other manufacturers have this in abundance. They can hit price points which Western manufacturers cannot. And, when looking at their skills and products, it seems that they can offer the quality which the operators are looking for.
Given their favourable cost base, skills in cost reduction and the globalisation of cellular standards, it cannot be too long before the Chinese manufacturers take a substantial market share in the telecoms equipment business.
