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A SIM card. China has at least 560 mobile phone manufacturers.

China has at least 560 handset makers and most sell into the low-end, low-margin sector

Chinese mobile phone handset manufacturers are expected to produce more than one billion devices this year, a tenfold increase from a decade ago. That accounts for 80 per cent of the world's supply.

But big volumes don't necessarily translate into big returns. Despite its huge share of handset production, China captured just one per cent of the industry's profits, according to Xinhua. Unsurprisingly, the bulk goes to the companies that design and market the world's handsets – with companies like Samsung and Apple most likely to cash-in.

"Chinese enterprises may be the number one in sales, but when it comes to profitability they are hardly competitive," says Liu Chun, an industry expert. Worse, profitability is even lower for cheaper phones – ie the sort Chinese firms make for developing markets. This depresses overall profitability given these phones can account for as much as 40 per cent of handsets made in China.

For instance, manufacturers make no more than RMB3 on phones costing RMB400 that are shipped to Africa, according to estimates in Xinhua. That's a profit margin of just 0.75 per cent – hardly the sort of return likely to get shareholders excited.

According to the same report, China has at least 560 handset makers, up from 480 a year ago, and most of them sell into the low-end, low-margin segment at home or overseas. "In the first eight months of the year our average sale price was only USD33.3, and most of the domestic handsets are shanzhai (counterfeit) phones," Liu told Jinan Daily.

He continued: "It is shocking how low the profit margin is. We only try to make it up in volume. The fact is the business has very poor prospects."

Such concerns are heightened by the experiences of more established handset makers like Nokia and Motorola, both of which have seen their margins drop steadily despite increases in sales volume.

The problem is that most Chinese handset makers are struggling to move from being contract manufacturers to becoming consumer brands, says Jiefang Daily. They focus on assembling handsets and spend little time or money on product innovation, branding or marketing.

It is shocking how low the profit margin is. We only try to make it up in volume

At least some are trying to make the transition, telecom giants Huawei and ZTE among them. Both have made inroads into developing branded products of their own. Still, the journey can be a difficult one. Currently, price competition in the lower tier of the market is so fierce that ZTE is thought to be losing money in its own handset business, says The Economist. "ZTE provides mainly low-price mobile phones in China. This helped it gain market share but still brings low profit margins," Ji Chendong, a consultant with KPMG, told the China Daily.

ZTE is the world's fourth biggest mobile phone maker, but in the first nine months the firm recorded a loss of RMB1.75 billion (USD280.9 million).

TCL, another of China's better known consumer electronics firms, is struggling with a similar problem. It announced in late October that net profit for the first nine months of the year was down 99 per cent to USD1.2 million. It blamed this steep drop on lower margins from its handset business. "In the past nine months, both the sales volume and profit margin of feature phones [ie basic models] have dropped. At the same time, we have increased our research and development expenses in smartphones [which have higher margins]," TCL advised.

To stay viable over the longer run, Chinese enterprises will need to think more about moving up the value chain and relying less on competing on cost. But that's easier said than done. The smartphone market is already highly competitive. And while the higher-end of the business is dominated by Apple and Samsung, an increasing portion of smartphone sales in China itself is priced more thinly at below RMB1,000. In a market fought over by hundreds of phone makers, that doesn't seem to leave much prospect for fat profits.

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