A little over a year ago, 38-year-old entrepreneur Liang Liwan wasn’t making smartphones at all. This year, he expects to build 10 million of them.
Liang’s company, Xunrui Communications, buys smartphone components and then feeds them to several small factories around Shenzhen, in southern China. There, deft-fingered workers assemble the parts into basic smartphones that retail for as little as $65.
Manufacturers built about 700 million smartphones last year. But the market has taken on a barbell shape. On one side are familiar names like Apple and Samsung, selling pricey phones for $300 to $600; on the other, several hundred lesser-known Chinese brands supplied by a thousand or more small factories.
The change began in 2011, when computer-chip makers began selling off-the-shelf chipsets—the set of processors that are the brains of a touch-screen phone. Those, plus Google’s free Android operating system, made smartphones much easier to produce.
The flood of inexpensive devices could hurt struggling phone makers like Nokia and might also force Samsung and Apple to offer cheaper models. “They have reached their peak,” Liang said during an interview near his office in Shenzhen, which has become a hub for electronics makers. “In [manufacturing] technique we are close to the same level. Then the only difference will be the cost and the brand.”
Larger Chinese companies, like Lenovo and Huawei, have also swarmed into China’s market with midrange phones that cost closer to $200. Lenovo captured 12 percent of China’s market last year.
Liang’s phones are the ultracheap kind. He builds them at several Shenzhen factories, like Shenzhen Guo Wei Global Electronics, a nondescript building that opened in 1991 as a manufacturer of fixed-line phones and audio equipment. At Guo Wei, young Xunrui engineers lounge about, smoking cigarettes and drinking warm Coca-Cola while playing games on various brands of laptops.
One floor up, past a metal detector and an enclosure where high-pressured air blows dust and other impurities off workers’ blue smocks, are the production lines—five of them, each with 35 young workers able to solder together and box up 3,000 smartphones a day.
Guo Wei has had to make some investments to get into the smartphone game, including importing new solder inspection equipment from Korea. One production line costs around $1.6 million to set up, according to Li Li, a production manager at the factory who showed off the equipment.
“The techniques are very complicated compared to older phones,” says Li, who joined the factory 17 years ago to work in a department that repaired fixed-line telephones.
But the real reason for the switchover to smartphones was that last year large chip makers, including the Taiwan-based MediaTek and Spreadtrum, started offering “turn-key” systems: phone designs plus a set of chips with Android and other software preloaded. Spreadtrum says it may sell 100 million units this year.
Each chipset costs $5 to $10, depending on the size of a phone’s screen and other features. In total, Liang says, his cost to make a smartphone is about $40. He says he can manufacture as many as 30,000 smartphones a day for brands such as Konka Mobile and for telecom operators like China Unicom.
In the United States, a smartphone’s high cost is generally masked by wireless companies, which discount them steeply if consumers agree to a contract. In China that happens as well. Liang says his phones retail for about $65 or $70 but can cost only $35 with a contract.
That is making China, now the world’s largest smartphone market, a challenging place for foreign firms to compete. Apple accounts for 38 percent of U.S. smartphone sales, but its share in China is 11 percent and falling. Google has even bigger problems making money. Even though the devices use Android, they often don’t come with Google’s apps and search tool installed (see “Android Takes Off in China, But Google Has Little to Show for It”).
Liang says his aim is to make smartphones that are affordable, even if they aren’t yet as good as an iPhone. That means the camera and LCD screen might not be the best, and the battery life could be shorter. “I always use this word ‘acceptable,’” he says. “A lot of users only need an acceptable product. They don’t need a perfect product.”
What’s certain, Liang says, is that the quality of the phones his factories produce will rise. “There is no profit at the bottom,” he says. “Everyone is trying to improve their techniques.”
Su Dongxia assisted with interpreting and research.