knowledge in local settings, with poorly developed or nonexistent support industries, with a
history of heavily regulated telephony, with a poorly developed hard wire telephony
infrastructure and with a negative view about the contribution of communications to
productivity, China constrained indigenous firms from moving first in China’s domestic market.

However, since the entry of Chinese domestic mobile handset manufacturers in 1998,
foreign brand products gradually lost their dominance in the handset market in China. In 2002,
Chinese brands captured about 30% of the market, growing to approximately 55% in 2003.
Chinese domestic suppliers have successfully established their position to surpass the market
share of joint ventures while direct imports largely have been phased out. Chinese brands are
becoming the mainstream products in China’s domestic mobile phone market.

How did China’s domestic firms catch up with the early movers, overcome inherent
disadvantages and succeed in dominating the world’s largest handset market in less than five
years? By examining the mobile communications sector as a whole and through case examples,
this paper examines how China’s domestic firms have surmounted their inherent disadvantages
and have taken a leadership position in limited product areas. This paper concludes with a
summary of factors that contributed to the success of China’s domestic handset manufacturers.

III. DEVELOPMENT OF CHINA’S MOBILE HANDSET MANUFACTURING SECTOR

The mobile communications market in China relied totally on direct imports in the late
1980s. During China's transition from a planned economy to a more market oriented economy,
telecommunications became a leading sector with an exponential growth rate in a dualistic
economy (Jin and Haynes, 1997). Realizing the attractiveness of its potential market demand for

China's Mobile Handsets FINAL DRAFT 2006.sph ERSA2006 Greece

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