OUTLOOK FOR TAIWAN’S CELLULAR PHONE INDUSTRY IN THE PAST TEN YEARS

8.1 THE GROWTH OF TAIWAN’S CELLULAR PHONE SHIPMENTS AND THE INDUSTRIAL HISTORY

Figure 17 shows Taiwan’s cellular phone, NB PC, and DT PC’s global market shares.

On the global market share side, from 1996 to 2005, NB PC and DT PC achieved remarkable global market shares very quickly.

Figure 17. Taiwanese PC and cellular phone’s global market share by shipments (Source: IDC, III)

In the PC industry, in order to cost down and improve time to market, it is common sense that OEMs select an outsourcing strategy. Over 80% of the PCs are manufactured by EMS/ODM, among which most are by Taiwan’s ODMs, but this is not the case in the cellular phone industry. With a lack of common standards such as PC’s Wintel, the cellular phone is not a standardized product. Instead, the cellular phone is a consumer product. Its product features and quality are more important than the cost. Major global cellular phone OEMs have no plans to reduce their in-house R&D efforts for new product development.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Taiwanese Shipments/WW Handsets Taiwanese Shipment/WW NB PC Taiwanese Shipment/WW DT PC

Under this background, we can separate Taiwan’s cellular phone industrial history into three stages: Before 1999, many of Taiwan’s IT ODMs started to develop their cellular phone businesses, such as GVC, Acer, and DBTEL. They did not easily receive outsourcing orders from foreign firms.

From 1999 to 2004, due to the emergence of China’s cellular phone market, and Alcatel and Motorola’s technology support, some of Taiwan’s cellular phone makers developed strongly, such as DBTEL, BenQ, and Lite-on. Taiwan ’s cellular phone ODMs previously enjoyed solid margins from strong exports to China’s domestic cellular phone OEMs in 2002-2004 (such as Ningbo Bird, TCL, and Konka). At the same time, Taiwan’s cellular phone makers received more and more outsourcing orders from global cellular phone OEMs.

Even Nokia outsourced orders of its Clam Shell style to BenQ and CDMA’s cellular phones went to FIH in order to target China’s market opportunity.

After 2005, Taiwan ’s cellular phone makers have been becoming more and more matured.

The first three cellular phone EMS/ODMs FIH, CCI and Arima, they have major clients Nokia, Motorola and Sony-Ericsson, respectively. BenQ merged Siemens’s cellular phone business group in 2005 and becomes the sixth brand name company in the cellular phone industry.

Table 30. The P-values of the Mann-Whitney U test of the ratio of Taiwanese firms receiving outsourcing orders between PCs and cellular phones

NB PC DT PC

Cellular phone 0.0002*** 0.0002***

Note: *** represents significance at the 1% level.

8.2 DEVELOPMENT HISTORY OF TAIWAN’S MAJOR CELLULAR PHONE FIRMS

In PC industry, Taiwan ODMs dominate the industry, and while Taiwan’s NB/PC shipments over 80% of global shipments, respectively. However, for cellular phones, Taiwan’s companies were latecomers while South Korean ODMs are ahead. Most of Taiwan’s cellular phone makers were matured until the recent years.

(1) FIH:

components, such as connectors and cases. In recent years, Hon Hai/Foxconn paid attention to telecom industry. The first, Hon Hai/Foxconn’s acquisition of Nokia’s component supplier, Eimo Corporation, further enhanced their relationship. Now FIH has been a major case supplier to Nokia for many years.

The second, starting in 2000, Hon Hai/Foxconn has been aggressively targeting to win Nokia’s business, and built a plant next to Nokia’s “Starnet” cellular phone industrial park in Beijing. On the other hand, after Hon Hai/Foxconn’s acquisition of Motorola’s Mexico CDMA plant in 2003, Hon Hai/Foxconn is getting CDMA technology and officially entering the CDMA cellular phone industry. With the great success of Hon Hai/Foxconn’s cellular phone business, the company spun off its handset division in fourth quarter 2004 and to list on the Hong Kong stock exchange.

Then FIH merged Chi-Mei Communication in 2005, so after three years of making PCBA (Printed Circuit Board Assembly) with low value-added and low profitability, FIH finally started to produce three complete models of GSM cellular phones in the second quarter of 2005 for Nokia, mostly for the China market. Right now Flextronics and Elcoteq Network are FIH’s major competitors.

(2) Compal Communications (CCI):

Compal Communication (CCI) was from Taiwan Compal Group’s cellular phone ODM business group. CCI uses TI’s chipset solutions and manufactures mainly for Motorola.

CCI was the No.3 cellular phone maker in Taiwan by volume and guidance of 8.3 million units in 2004, and shipped over 13m units for Motorola and became the leader in the Taiwan’s cellular phone ODM business by volume in 2005.

Although about 80% of CCI’s shipments in 2004 were Motorola low-end phones, CCI’s ASPs and margins are better than FIH and Arima Communication. Because CCI is the only Motorola-certified testing centre in Asia, and has the in-house source code and the high-level R&D ability. After 2005, CCI merged Compal Group’s cellular phone ODM business group and become stronger in order to compete with FIH. The company has more than 800 engineers located in Taiwan now. In our view, CCI will be one of the technology leaders among the Taiwan’s cellular phone ODMs.

(3) Arima Communications:

Arima was set up in 1999 and has been soaring from 2001. Arima was the No. 2 cellular phone manufacturer in Taiwan by volume in 2004. Arima shipped 10.1 million cellular

phone units in 2003 and 10.05 million units in 2004. The company major produced cellular phones for Sony-Ericsson.

Arima’s cellular phones projects are close to an EMS basis. That’s why Arima’s margins are lower than those of its Taiwan’s competitors. Arima tried to enhance its R&D capability from 2003 to being closer to a typical ODM instead of an assembly-intensive EMS. Arima’s R&D manpower is about 500 people right now.

(4) BenQ-Siemens (BenQ):

BenQ started its cellular phone business before 1995 and was Taiwan’s No.1 cellular phone manufacturer by volumes before 2004. BenQ shipped 11.6 million cellular phone units in 2003 and 12.8 million units in 2004. BenQ mainly produced the low-end phone for Motorola in 2003, and Motorola as the key ODM customer accounting for over 60% of total volume.

Because BenQ developed its own brand business, Motorola cut their outsourcing relationship with BenQ after 2004. BenQ shifted to Nokia and South Korea’s Kyocera. In order to develop more new models for BenQ’s product roadmap, the company has about 700 engineers globally before merged Siemens’s cellular phone business, and major manufacturing facilities are located in China, Malaysia, and Mexico.

After 2005, BenQ has been focusing on its own brand business, especially in emerging markets such as Russia, Latin America, Eastern Europe, India, and China. Then BenQ merged Siemens’s cellular phone business group in 2005 and becomes the sixth brand name company in the cellular phone industry. BenQ’s branded cellular phone business has seen excellent progress, and it also has successfully entered retail channels in developing markets.

(5) High Tech Computer Corp. (HTC):

Founded in 1997, High Tech Computer Corp. (HTC) is a technology provider specializing in converged mobile devices, such as PDA (Personal Digital Assistant). HTC designs, manufactures and markets innovative Smart Phone and PDA Phone devices. Before 2002, PDA was its major product line. Then HTC started its customized Smart Phone for mobile operators directly. It uses Microsoft’s handset software platform that is an open operation system to design its cellular phones that can use third parties’ resource and deal with the enhanced data service.

Figure 18. Taiwanese major cellular phone firms’ sales in the past five years (Source: Financial statements and newsletters of Taiwanese companies

0

486 645 682

1,137

2,257

62

1,211

470 495

73 7 1,838

2,913

3,397

4,618

3,888

439

956

2,375

3,5 44 3,3 08

410 450 177 181

43

5,690

1,091

0 1000 2000 3000 4000 5000 6000

2001 2002 2003 2004 2005

HT C CCI Arima Ben Q OKW A P FIH (unit:Million $)

CHAPTER 9 THE DEVELOPING MODEL OF TAIWAN’S CELLULAR