Motorola is losing its hold on China's mobile phone market. The little local startup that has Moto's number: Ningbo Bird.
Wired 12.04 ⎢ April 2004
"CELL PHONE? IT'S A HAND GRENADE!" cries actor Zhang Guoli at a key moment in China's hit movie Cell Phone, an edgy comedy about a philandering TV talk-show host whose life falls apart after his wife discovers the call log on his mobile handset. The picture was a box office sensation last winter, setting off a wave of marital mistrust. Personal computers are still rare in the People's Republic, but the proliferation of cell phones is changing both the country and the global telecom industry. With some 260 million mobile subscribers, this is the largest wireless market on the planet. Young people use mobile dating services to meet for casual sex. Wealthy businessmen carry a different handset for each mistress. Which is why director Feng Xiaogang made this the subject of his latest film, and why posters for the movie play off the actor's line: They depict the Motorola A760 — a hot new smartphone that's China's answer to the Treo 600 — as a hand grenade.
If anyone knows how explosive cell phones can be, it's the folks behind the A760. For years, Motorola has dominated the handset market in China as it once did worldwide; Nokia has held down second place. Increasingly, however, both companies are being threatened by a local outfit with the unlikely name of Ningbo Bird — "flapping wings and flying high," as its marketing spiel boasts. For Finland's Nokia, which turned a tidy profit in 2003, this comes as an embarrassment and a challenge. But for US-based Motorola, a $27 billion-a-year Goliath beset by declining sales, massive layoffs, an anemic stock, shareholder unrest, and executive turmoil, it's more than just humiliating. With handset sales one of the few bright spots on Motorola's balance sheet and China its biggest market, the rise of Ningbo Bird and other Chinese rivals is a dangerous development.
How did little Ningbo Bird become Motorola's worst nightmare? That's the question they're asking in Beijing's Motorola Tower, a squat steel and glass landmark overlooking the rush-hour traffic jams on the Third Ring Road, a massive expressway that carried donkey carts when it opened 10 years ago. Motorola got to China in 1987, before anyone else in the electronics business, selling pagers and bulky analog handsets with the look and feel of bricks. In the early '90s, when capitalism took off under Deng Xiaoping, Motorola became the phone of choice for the newly rich. As the market grew, Nokia and its European rivals grabbed their share, but Bird and a host of other Chinese wannabes — many of them consumer electronics outfits like TCL or hulking appliance manufacturers like Haier — were considered a joke. Until now.
Reliable data in the Chinese cell phone market is notoriously hard to come by, but Brian Lu, general manager of Motorola's China handset division, concedes nothing. Even though the company's own figures show its share of the market to be half of what it was four years ago, Motorola is still number one. Besides, Lu declares, "We view ourselves as a local company. Most of our operations are in the region — manufacturing, design, R&D." Lu himself is local — born in Beijing, raised in Shanghai, educated in Xi'an before he went to the States for his MBA and was recruited by Motorola. "We have been a good citizen for China," he maintains.
"The intensity of competition in this market is unparalleled," says Veronica Gao, a former McKinsey consultant who now works as Lu's strategy chief. "You have all the multinational brands as well as 20 or 30 local brands, and the local guys work in a fundamentally different way." She's referring to the fact that the Chinese government not only provides R&D funding to homegrown competitors, it also allows state-owned banks to keep the weaker ones afloat even if they're losing money. But that does nothing to explain the inroads Bird and other top Chinese brands have made with consumers.
To counter their appeal, Motorola has gone on the offensive. Its logo is slathered across every Cell Phone ad. (There's nothing subtle about product placement in China.) A plethora of new Motorola handsets, made in China for Chinese tastes, has muscled its way into the stores. At a product launch in December, Western fashion models in slit skirts and feathered headdresses strutted around wearing strap-on phones while a revolving jumble of flat-panel displays flashed MOTO BRAINS! MOTO BEAUTY! MOTO MOTO! How important are China handsets to Motorola? "It's our number-one priority," says Gao, sweeping away her peekaboo hair as Beijing's skyline fades into the dusty haze behind her. "It's the market, if anything, that we want to maintain our leadership in."
IT SEEMED A BIT NUTTY in 1999 when Bird, then a small, provincial electronics outfit, started turning out cell phones. Motorola controlled about a third of the market; Nokia, Siemens, and a handful of other foreign companies shared most of the rest. Chinese brands were all but unknown. And the big multinationals didn't just slap together phones — they also designed and made the chips that went inside and the network infrastructure that handled the calls. This was high tech stuff. But what's high tech today is low tech tomorrow, and Ningbo Bird happened to jump in just as European outfits like Wavecom and Sagem were starting to sell off-the-shelf chipsets that performed all the basic functions of a cell phone.
Even though Bird and the other Chinese manufacturers that followed came in at the low end of the market, their main selling point wasn't price. Most of the international brands on sale in Asia are made in China, too, and their no-frills models are churned out in such volume that it would be hard for anyone to make them more cheaply. The big advantage the Chinese makers have had all along is knowing the market. "They're designing for domestic consumer tastes," says Ted Dean, managing director of the consulting firm BDA China, "and global makers have been designing for the global market." Nokia in particular was slow to abandon its signature look, even when clamshell designs proved more popular with Chinese consumers. And crimson heart-shaped clamshells with cubic zirconium encrustations and pulsing lights? Not likely, no matter how many Chinese schoolgirls are desperate to have them.
Knowing the market means catering to Chinese consumers, but it also means being able to reach them. The international players relied on nationwide distribution outfits that employed elaborate systems of subcontractors. They had distributors who distributed to their distributors — and yet somehow, they still reached only the major urban areas. Not so the local guys. "They focused on smaller cities," says Colin Giles, Nokia's general manager for China, "and they caught a lot of international companies on the hop." They also came along just as subscriber growth in the big cities was starting to max out: With some 75 percent of Beijingers now carrying a mobile phone, the growth market has shifted to the provinces. Consultants predict that in three years, half a billion Chinese — double today's figure — will own cell phones. In response, Nokia has put employees in 60 cities across China instead of just four; Motorola has opened an office in every major city. But running such an operation isn't easy in a country of 1.3 billion people speaking 10 major dialects and hundreds of smaller ones, each incomprehensible to everyone else.
The game is far from over. To status-conscious users in big cities — booming Guangzhou, trendy Shanghai, staid Beijing — Western brands still have more cachet. Nokia seems hip; Motorola conveys worldly success. "Chinese consumers are always looking for the next best thing," says Norbert Chang, CEO of a Beijing-based wireless entertainment startup called Enorbus Technologies, "and phones carry a lot of weight." Chang works closely with China Mobile and China Unicom, the country's only two service providers, and can tell you anything you want to know about polyphonic ring tones and Java apps and the appeal of fake diamonds and snakeskin covers — but sometimes even he gets a jolt. Last fall, he was meeting with the CEO of a Chinese gaming company when the guy offhandedly remarked that he'd already bought eight phones that year. Then there was the day Chang's secretary pulled out a joystick-equipped Nokia phonecam that sells for double her monthly salary.
The other big advantage the Western companies can claim, at least for the moment, is in R&D. Local manufacturers can't yet compete, for example, with Motorola's China Research Center in Shanghai, where 50 people — all of them Chinese, almost all of them PhDs — focus on human-machine interaction. Occupying the 38th floor of a glitzy Shanghai office tower, they're working on getting digital devices to speak, to understand human speech, and to recognize handwriting and other images. Their research was a big factor behind the A760, which unlike Western PDA/phone hybrids lets you use a stylus instead of a keypad — much easier for a language that relies on several thousand characters instead of a 26-letter alphabet. The A760 recognizes Chinese handwriting, responds to voice commands given in either Mandarin or Cantonese, and talks back to you. The Shanghai lab has also been working on text recognition in 15 European languages and speech recognition and synthesis in six; models that take advantage of these capabilities are expected to hit the US and Europe later this year. "We claim the leading position in human interaction research," says Motorola scientist Zhang Yaxin. "Now we need to keep this position."
Over the long term, however, the trend is clear. "The danger to the foreign brands," says Hurst Lin, COO of Sina, China's leading Web portal, "is that the domestic brands can move upscale. Look what happened with Japanese automakers in the '70s and '80s. They started with the Civic and ended up with the Lexus." Here the threat comes not just from Ningbo Bird but from the people who made Motorola a powerhouse in China to start with. Roger Kung created Motorola's Asia handset business from scratch in the mid-'90s; Nathan Wang was his liaison with Internet portals and game developers; Vincent Cheung ran quality control. Now they head a Shanghai startup called E28 whose first product, launched last fall, is a $625 Linux-based phonecam/PDA that uses a stylus instead of a keypad. It can't do voice recognition, unlike Motorola's A760, but it does a mean translation: Point to a Chinese character onscreen and it displays the same word in English; point to an English word and you get it in Chinese.
So Motorola has to hold on to its traditional customer, the well-heeled business exec, even as it tries to strengthen its appeal to a different sort of upscale Chinese consumer — younger, hipper, more fashion-conscious. At its product launch in December, Motorola unveiled eight phones equipped with various combinations of goodies — cameras, camcorders, Bluetooth, polyphonic ring tones, photo caller ID, tri-band, quad-band — bundled into sleek little cases that should slip comfortably into your Prada backpack. At least, that's the hope. But with Ningbo Bird and its ilk spitting out new models every few months, the competition is quickly moving up the food chain. Norbert Chang has noticed it with the game developers he's been hiring at Enorbus recently: "They're all coming in with Bird phones," he marvels.
THE WORLD HEADQUARTERS OF NINGBO BIRD is a brand-new industrial park that looks like a cross between a Silicon Valley office complex and a minimum-security prison. It's situated on the outskirts of Ningbo (population 5.4 million, about the size of metropolitan Washington, DC), a bustling high tech and garment center not far from Shanghai on China's central coast. Along with Guangzhou to the south, this is the entrepreneurial heart of China, a prosperous region that's as fixated on commerce as Beijing is on power. Ningbo itself has been a major port since the Tang Dynasty, which ended more than 1,100 years ago. Today it's full of sleek high-rises and postmodern factory buildings, leavened by the odd Portuguese church left over from its days as a colonial port.
Bird — the logo is in English, with a winglike shape slashing through the B — is just outside the nearby town of Fenghua, on a four-lane highway that still carries more bicycles than cars. The sprawling campus was an open field until construction began two years ago. Now it boasts two factories, a modest office suite, a dining hall, an apartment complex, and a small hotel, all surrounded by a low iron fence. The parking lot is microscopic by Valley standards: a couple of Audis, a few SUVs, and some double-decker buses that shuttle workers back and forth from town. Metal towers festooned with high-tension lines march past the front gate. A Buddhist temple rises in the distance, just before the flat coastal plain gives way to mist-shrouded mountains.
"Motorola and Nokia have no chance to take back the market," declares Ma Sitian, Bird's vice general manager, a stocky, middle-aged man in brown slacks and a dressy black leather jacket. Everybody at Bird is wearing jackets: It's winter, yet there's no heat. Something about the benefits of fresh air. That fits with the image of Xu Lihua, Bird's CEO, a man who's legendary for his drive and ambition: "His attitude is just go-go-go, try-try-try," Ma explains in Mandarin (no one at Bird is fluent in English). "Never give up until you get to the Yellow River, and even when you get to the Yellow River you still look for a boat."
Before Bird made cell phones, it made pagers. The company was formed in 1992 by Xu and three other young engineers who were working near Guangzhou. Chinese capitalism was in its infancy then, the disastrous upheavals of the Cultural Revolution barely 15 years past, the mass starvations that followed Mao's Great Leap Forward still disturbingly fresh to many. The four men had written a business plan for a pager startup, but they couldn't get funding. When the government of Fenghua, several hundred miles away, promised them investors, they moved. The name Bird was suggested by the wife of one of the founders while she was studying economics in Canada. They liked its connotations: small, fast, unfettered. Looking for a similar-sounding word for their official Chinese name, they settled on bodao, which means "leader in communications." It was a stretch.
Motorola dominated the pager market in the early '90s. Distributors weren't interested in taking on an unknown Chinese brand, so Fenghua Bird, as it was known then, set up a nationwide network of call centers that did double duty as retail outlets. Bird never displaced Motorola, but it did become the top local brand, selling more than a million units a year by 1996. That's when Xu decided the company had to get out of pagers and start making cell phones. When the first models came off the production line in 1999, the firm hadn't yet obtained a government license to sell them. "It was like not being married but having a baby," explains company spokesperson Yu Jinhua. A hastily arranged marriage with the Ningbo Electronics Communications Group — which had a license but no phones — yielded the company now known as Ningbo Bird.
The Ningbo Bird story has since entered China's annals of entrepreneurship — how Bird went from selling just 700,000 handsets a year to 2.5 million to nearly 7 million, finishing third behind Motorola and Nokia. Bird denies getting financial assistance from the government, even though its biggest shareholder is China Putian, the state-owned conglomerate that also holds stakes in several other local cell phone companies. In the Bird mythology, the company's "fighting team" has done it all. As Yu puts it, "Motorola is like 40-year-old people, and Bird is like 20-year-olds — go-go-go and try-try-try!"
The average age at Bird is actually 26. Most of the 6,500 employees in Fenghua work in the factories, where they earn about $100 a month and are provided with athletic facilities (a gym is under construction in front of the soccer field) and sparkling-clean squat toilets. Fenghua is hardly Shanghai, so it's unlikely they'll get distracted by nightlife or hired away by competitors. What's good for the factory workers is even better for managers and researchers: Anyone with a college degree is eligible to live onsite, with PhDs getting the best apartments available — three bedrooms, as opposed to two-bedroom shares or studios.
Bird employs PhDs because it's no longer content slapping together phones from components provided by its French partner, Sagem. Bird wants more, and so does Beijing's Ministry of Information Industry, which regulates the telecom sector — manufacturers included. In a speech at a tech expo last September, ministry chief Wang Xudong laid out the government's plan for infotech through the year 2020. Tops on his list was cultivating national enterprises that are competitive on the world stage, and shortly after that came developing homegrown technologies. Just the previous month, as it happens, Bird had introduced the DoEasy E868, the first smartphone completely engineered by a Chinese company. It can't do everything the Motorola A760 can do, but it's a milestone nonetheless. "With that move," the MII official in charge of wireless proudly told China Daily, "Chinese mobile-phone makers broke the monopoly of foreign businesses in core technology."
Beijing has a lot to do before it can accomplish its goal of creating national champions in the global marketplace. Among other things, it has to stop letting its banks bail out money-losing manufacturers, which are making life as difficult for Ningbo Bird as they are for Motorola. But look at it this way: China Mobile and China Unicom have more subscribers than Vodafone and T-Mobile — the biggest international carriers, with operations spread over five continents. According to Gartner, the sheer size of the market means that one of China's leading manufacturers will join the global top 10 before the end of this year. Hand grenade? That's an ICBM. Already Bird is exporting 100,000 cell phones a month to southeast Asia, India, and Russia. And the US? "It is our dream," declares Ma Sitian, demonstrating the stylus-input feature on his $500 DoEasy E868 as the setting sun deepens the chill in his office. "But it means a lot of investment," he adds soberly. "So we are still preparing." ■
Cell phone shopping with Red Poppy Ladies Percussion.
WITH SOME 600 CELL PHONES on the market, China presents a challenge to even the most determined gadget freak. So we decided to hit the stores en masse with the members of Red Poppy Ladies Percussion, an all-female drumming troupe. Like many hip young Beijingers, the Red Poppy ladies have a preference for Western chic — though Chinese manufacturers are starting to bring out models that might change their minds. Here are the Red Poppy picks.
Siemens' Xelibri line is a big hit with Hattie Hu, Red Poppy's manager. Small and lightweight, these phones are designed to be worn on a neck chain. Hattie likes the sleek black and silver Xelibri 4 (approximately $155 US), with its V-shaped keypad. For narcissists, the mirrored Xelibri 6 ($265, available in bronze or platinum blush) lets you talk and apply makeup at the same time.
Samsung is one of the most popular foreign brands in China, and Feng Xue, Red Poppy's newest member, is taken with its Anycall T508. A clamshell model, it has an ultrafeminine look: faux-diamond-studded analog clockface on the ruby-red exterior, color screen on the inside — all for less than $450.
Hattie's guy friends think Sony Ericsson is really cool — great for games, with sound quality that's good enough for karaoke. (Cell phone karaoke is almost as big in China as in Japan.) Take the T628 ($360). A Bluetooth-enabled phonecam, it has an oversize color screen and a WAP browser that takes you directly to the apps and services on China Mobile's popular Monternet service.
The suit-and-tie crowd will be impressed by the $285 Nokia 6108. At just 98 grams, this is a smartphone that's not weighed down by feature-creep. It's a tri-band model, made for roaming on international networks. Flip down the keypad and you find a "keymat," a screen you can write on with a stylus. But there's fun stuff too — a camera, plus Java for the latest games.
It's a safe bet that Hattie and her friends would have been smitten with Ningbo Bird's recently announced 5100 (price still to be determined) if it had been on the shelves when we were shopping. This is the his-and-hers phone set for young lovers. Hers comes in a lavender hibiscus-blossom pattern with cubic-zirconium highlights; his is a little more, well, masculine. A commitment, yes — and yet easier to get rid of than a tattoo. ■
Contributing editor Frank Rose wrote about Philip K. Dick in Wired 11.12.