As China handset makers upgrade chips, pressure remains on profit margins

HONG KONG (Reuters) - Chinese mobile phone makers chasing market share with lower prices in the world’s biggest smartphone market will see their margins continue to be pressured as they upgrade to quad-core chips to satisfy demand from users for faster speeds and flashier graphics.

Huawei mobile phones are displayed in one of its offices in the southern Chinese city of Shenzhen September 24, 2012. REUTERS/Bobby Yip

Most smartphones now are equipped with single and dual-core chips, but Chinese handset makers are planning quad-core powered devices as consumers get more picky with the speed of screen swipes, how fast they can download movies, send a photo via WeChat messaging or seal a purchase on Taobao online mall.

“The Chinese handset vendors have now extended their reach and low-price strategy to the quad-core phone segment,” Lisa Soh, an analyst with Macquarie, said in a report. “This hurts the hope that the Chinese handset makers can improve margins through moving up product segments.”

Already, Huawei Technologies Co Ltd, ZTE Corp, Lenovo Group Ltd and Xiaomi Technology, have unveiled quad-core smartphones running on Google Inc’s Android operating system. They are using chips mainly from Samsung, Qualcomm and Nvidia.

Industry executives expect more quad-core models next year as chipmakers such as Qualcomm and Mediatek introduce processors customized with Chinese applications that will make it easier, quicker and cheaper for handset makers to launch new products.

U.S.-based Qualcomm Inc and Taiwan’s Mediatek Inc have unveiled the high-end chips with designs that will help Chinese mobile phone makers launch smartphones in a shorter time at lower costs.

On Wednesday, Mediatek, Taiwan’s biggest chip designer that sells more than 80 percent of its mobile phone processors to Chinese vendors, launched its quad-core chip and expects its partners to unveil handsets early next year, executives said.

Smartphone sales are booming in China, which has more than 1 billion subscribers. Sales will grow to 165-170 million units this year from 78 million a year earlier, research firm Gartner said, helped by the proliferation of Internet use.

Currently, Samsung is the top smartphone brand in China, but Chinese vendors are fast gaining traction. China’s Lenovo, Coolpad and Huawei are now ranked No. 2, 3 and 5 respectively in the Chinese smartphone market, IDC said.

“The only gap between the smartphone versus the consumer in emerging countries is the price,” said David Ku, CFO of Mediatek, which expects to ship more than 110 million smartphone chips this year.

Jeff Lorbeck, senior vice president for Qualcomm’s product management told Reuters this month that it was likely that some of the quad-core powered smartphones could sell below 1,000 yuan ($160).

“I like to use my phone to buy things online, update my status on Renren (a social networking site) and read what friends are up to on weibo microblogs,” said Liu Liang, a 24-year-old financial executive who lives in Beijing and uses a quad-core Samsung Galaxy Note II.

“I haven’t bought a Chinese smartphone. But if my friends start recommending me good models and Chinese smartphones step up in their branding, I’ll definitely consider one.”

($1 = 6.2460 Chinese yuan)

Additional reporting by Grace Li; Editing by Matt Driskill