Voicemail for Nokia: "China Calling"

It started with low-end products, such as children's toys. Then it happened to higher-end goods, such as TVs and DVD players. Chinese manufacturers, backed by ultracheap labor, seem to turn everything they touch into cheap commodities. That's a boon to consumers the world over, but a bane for multinationals who have lost a large chunk of their profits to low-cost Chinese rivals.

Now, it may be the turn of global mobile-phone giants, such as Nokia Corp. (NOK ), to feel the heat from China. Multinationals currently have a near lock on handset sales in China, which will top 65 million units this year--17.5% of the world total, according to Merrill Lynch & Co. But local Chinese manufacturers are expected to double their market share, to 30%, in the next two to three years. It may only be a matter of time before such companies as TCL Holdings Co. Ltd. and China Kejian Co. begin churning out inexpensive cell phones for export.

The Chinese may not be as tech-savvy as Nokia, but that's no obstacle when you've got the likes of Microsoft Corp. (MSFT ) on your side. The software giant from Redmond, Wash., is just one of a host of players hoping to profit from the shifting dynamics of the mobile industry. With the cellular business moving away from vertical integration--in which one company writes its own software and designs and makes its own cell phones--"China is going to become an integral force," says Larry Kung, director of strategic business development for Microsoft Greater China. Microsoft is working with Chinese handset makers using its Windows SmartPhone software, which the giant is pushing as a standard industry operating system for Net-linked cell phones.

One of the companies cooperating with Microsoft is TCL Holdings Co. Already one of China's top makers of TVs, Guangdong-based TCL moved into handsets a few years ago. Now it ranks No. 4 in China, ahead of Ericsson (ERICY ), with more than 7% of the local market. Another key to TCL's quick ascent is its partnerships with Wavecom, a French company that designs the guts of wireless phones.

San Diego-based Qualcomm Inc., meanwhile, is working with 18 Chinese manufacturers to produce mobile phones using its code division multiple access (CDMA) technology. "The Chinese are very good manufacturers, and they will learn to make CDMA phones that they will sell around the world," says Qualcomm China President Richard Sulpizio.

Nokia and the other giants aren't yet quaking in their boots at the Chinese challenge. China has close to two dozen local manufacturers of handsets--too many, says Peter A. Borger, president of Siemens Shanghai Mobile Communication Ltd., which produces 35% of the phones made by the German giant. "There's almost nobody below 30 million phones [of annual output] who is really profitable worldwide," says Borger. "China needs to consolidate its 20 companies into two or three." Perhaps. But the Chinese have a habit of persisting in whatever they do. Those Chinese phones may be popping up in New York and London a lot sooner than Nokia would like.

By Bruce Einhorn in Shanghai

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