Reader TTS

In a factory compound called “Silicon Valley Power” in the southern Chinese city of Shenzhen, one of the white-tiled buildings is locked. Until last year, it was home to a mobile phone

assembly line. “They closed down and sent the workers home,” says a guard. RunPhoto | Riser | Getty Images In Shenzhen, the epicenter of the global handset industry, such closures are quite

common these days. Chinese consumers’ love affair with smartphones, with their internet access and superior functionality, is wreaking havoc with white-label makers, the thousands of small

companies that have been providing less affluent Chinese consumers with low-end phones. Some churn out cheap copies of the latest branded phones but others create new products tailor-made

for the needs and tastes of Chinese migrant workers, small town merchants and peasants, such as phones studded with fake crystals and handsets with extra strong speakers and long battery

life that allow workers to listen to the radio on a noisy construction site. Their products come unbranded or under little known brands and at a fraction of the price of a Nokia phone.

Companies producing these mobile phones accounted for about half of the Chinese handset market in 2010, but now they are struggling. Gartner, the research firm, estimates that white-label

handset sales dropped 7 percent in 2011 to 186million units, or 42 percent of all mobile phones sold in China, and will plummet another 30 percent this year. One reason is the rollout of 3G

mobile services in China, which means consumers want to use their phones to access the internet. Operators are also subsidizing smartphones and marketing them in small town China, where

white-label handsets used to rule. “Consumers are becoming more sophisticated – they are learning to demand quality, and they are becoming brand conscious,” says Sandy Shen, head of consumer

research at Gartner in Shanghai. Hundreds of white-label handset manufacturers have closed down as a result. But for some, the shakeout is an opportunity. Next door to the shuttered factory

at Silicon Valley Power, SOP GROUP, a mid-size Chinese handset maker, is expanding. “We are investing big in quality control,” says Mei Saichun, the company’s general manager, pointing to

machines that bake, steam, smash and scratch his phones to test resilience. SOP manufactures about 300,000 handsets a month, and about half of them are now smartphones. Companies such as

K-TOUCH, GIONEE, COOLPAD, MEIZU, OPPO and BUBUGAO are also quietly building their brands, forming a new breed still unnoticed in developed markets where Huawei, the telecom equipment maker,

is making a splash by pushing into the consumer market. Life for the second-tier handset makers is not easy. The price gap between them and the global brands in smartphones is much smaller

than it was between a global brand phone and a low-end feature phone in the past due to operator subsidies. The phone companies also find it harder to differentiate themselves. “Smartphones

look much more similar to one another – a big touch screen, a small size range, few keys, few colors,” says Su Feng, vice-president at Coolpad. The companies respond with different

strategies. Some target niche markets. Oppo and Bubugao, two companies in the industrial town of Dongguan not far from Shenzhen, have successfully positioned themselves as phone brands for

women. Coolpad, meanwhile, cooperates closely with mobile operators. Meizu, a home-grown answer to Apple in Zhuhai, across the Pearl River from Shenzhen, runs its own app store. “What makes

us different in the eyes of our customers are applications, not hardware features,” says Hua Hailiang, the company’s sales head. Meizu’s app store hit 100million downloads last week – just a

fraction of Apple’s 25billion worldwide, but a source of pride for the Chinese firm. Another area for growth are overseas markets less developed than China. SOP now exports about one-third

of its handsets through offices in Indonesia, India and Ghana. “The fact that some markets in South Asia and Africa still lack 3G, many consumers there cannot read and they just can’t afford

smartphones means their demand will remain focused on feature phones for another two or three years,” says Adam Chen, head of the group’s export unit. Despite the challenges, the

fast-growing smartphone market should offer room for Chinese second-tier brands. IDC forecast last week that China will overtake the US as the world’s largest smartphone market this year,

and that India and Brazil will rise into the top five markets by 2016. The research firm added: “To realize the full potential of emerging markets, smartphone vendors need to develop

low-cost smartphones that provide a full, robust experience.”