Introduction

China's market saw strong growth throughout 2008. Shipments rose to 23.6 million units, a 30% increase over the previous year. accounted for 15.3% of total shipments, up from 12% in 2007. Mobile Internet applications, GPS, and multimedia functionality were the most important drivers.

In the smartphone OS marketplace, retained its leading position and saw a small share increase in 2008 due to steady growth of Nokia smartphone sales and a drop in smartphone sales. The failure of Motorola, the most important supporter of Mobile Linux, is the main reason for the drop in Linux sales.

However, Symbian is about to face severe competition from Android and its derivative open mobile phone operating system (OMS). Android is free, while the OMS is available for a small license fee and provides a complete smartphone solution. A large number of mobile phone manufacturers, even some from the Symbian camp, are developing and producing Android-based smartphones. As a result, Symbian is now providing its OS and related software stack as open-source.

Symbian and Android are taking different approaches to reallocating software stacks and opening source code, but the net result is that the barriers to market entry will be significantly lowered. In the past, Symbian set high barriers for would-be smartphone manufacturers, requiring them to use its OS and license the UI/middleware layer (for example, Nokia's ) from other vendors, a rather long and difficult process. As for the other market players, Microsoft has a high per-license cost and Linux, while free, requires significant upfront investment to adapt it to a smartphone platform.

Symbian's and Android's strategy will drastically reduce barriers to entry by providing a complete and royalty-free smartphone software platform. The smartphone market will become more competitive, prices will fall, and innovation will lead to improvements in business models, industry chain innovation, services and device convergence, and the creation of consumer need. Lower barriers will strongly fuel

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C hina's smartphone market overall, and the effects will be visible by the end of 2009.

The turnkey chipset platform solutions from and MediaTek are another important factor in lowering market entry. They will shorten product time-to-market and reduce the risk of "grey" or local smartphone manufacturers being drawn into the market. Add to this higher mobile bandwidth from services and thriving mobile applications, and In-Stat predicts that the compound annual growth rate of China's smartphone market will be 25% through the period 2009 to 2013.

Figure 1. China's Smartphone Market Shipment Forecasts, 2009–2013

In This Update

Introduction 1

Definitions 5

Overview 6

Market Shares 6

Design Trends 8

Smartphone Value Chain Analysis 10

Smartphone OS Market Trend Analysis 10

Smartphone Chipset Platform Market Trend Analysis 17

Drivers and Barriers 19

Lower Entry Will Fuel Market 19

3G Brings Higher Bandwidth 21

Thriving Mobile Applications a Significant Driver 24

Battery Life Lags 25

Market Forecasts 26

Methodology 27

List of Tables

Table 1. Operator 3G Network Deployment and Devices Strategy 22

Table 2. China's Smartphone Market Shipment Forecasts, 2009–2013 (in Millions) 26

List of Figures

Figure 1. China's Smartphone Market Shipment Forecasts, 2009–2013 2

Figure 2. China's Smartphone Market Shares, by Vendor (2008) 7

Figure 3. Key Nokia Smartphone Launches (2009) 7

Figure 4. Key Dopod Smartphone Launches (2009) 8

Figure 5. Smartphone Design Trends 9

Figure 6. China's Smartphone Market Shares, by OS (2008) 10

Figure 7. Smartphone OS and Manufacturer Matrix 11

Figure 8. Offering 12

Figure 9. Android Platform Architecture 13

Figure 10. Microsoft Windows Mobile 6.5 16

Figure 11. Free Symbian Software Platform 20

Figure 12. Android and Traditional Linux Comparison 20

Figure 13. MTK and HuaWei Turnkey Smartphone Solution 21

Figure 14. China's 3G Subscriber Forecasts, by Operator (2009–2011) 23

Figure 15. Main Problems Using Phone-Based Mobile Internet Applications 23

Figure 16. Most Commonly Used Phone-Based Mobile Applications 24

Figure 17. China's Smartphone Market Shipment Forecasts, 2009–2013 26

Definitions

A smartphone is a mobile phone that uses a recognized operating system (OS). These include Mac OS, Microsoft Windows Mobile, Symbian, Mobile Linux (including Android), RIM OS, and Palm OS.

The (OHA) is led by Google and is an alliance of dozens of companies focused on developing open software platforms for mobile devices. Members include HTC, , Motorola, , , Samsung, LG, T-Mobile, , and .

Android is a free mobile software platform that includes the Linux kernel, an application development framework, and various core applications. It was initially developed by Google and later by the OHA.

The open mobile phone operating system (OMS) is a version of Android developed by Inc. for use with mobile devices in China. Smartphones that run OMS and are customized by the Corp. are called Ophones.

A user interface (UI) is the means by which users interact with a device, including input and output. Middleware is a software bundle that connects software components or applications; it is usually located between the operating system and the application software.

Overview

Mobile Internet applications, GPS, and multimedia functionality drove the development of China's smartphone market throughout 2008.

Of the thirteen smartphone models Nokia launched in 2008, ten had integrated GPS-enabled chips. Also, In-Stat estimates that 14% of all smartphones shipped in China in 2008 were equipped with GPS, and the percentage continues to rise. Mobile Internet applications for web surfing, location-based services, instant messaging, and mobile online gaming are another crucial market driver, as is the commercial launch of 3G networks in China, which will greatly improve the user experience for mobile Internet applications and further boost the smartphone market over the next two years.

Functionality has become the most important consideration for China's 130 million mobile Internet users in buying a new mobile phone. Features such as GPS, high-resolution cameras, display size and resolution, and video codec have become more important than price. Smartphones with rich and advanced functions are the first choice for this consumer segment. Market Shares Nokia continued its dominance of China's smartphone market in 2008 and currently enjoys a 68.7% share. The company has been broadening the smartphone concept by adapting the powerful Symbian OS to different mobile phone series for specific consumer segments. Its top-selling N series features advanced and powerful functionality, its 5 series is designed for music lovers, and its 6 series and E series are for business users. This strategy has led to significant increases in sales.

Nokia has also been concentrating on the communication functions of its mobile phones. In response to stiffer market competition and the emergence of connected services promoted by Apple and Google, the company launched its first touchscreen smartphone (the 5800XM) and an application store (the Ovi Store) in 2008. Nokia will certainly lose market share due to its increasing number of competitors, but its sales growth should remain steady.

Figure 2. China's Smartphone Market Shares, by Vendor (2008)

Nokia's plans call for the release of about 15 smartphone models between now and the end of the year, including new phones in the 5, 6, N, and E series. Figure 3 shows some key products.

Figure 3. Key Nokia Smartphone Launches (2009)

Dopod's share of China's smartphone market grew markedly in 2008, to 5.5% from 2.8% the previous year. The company's corporate parent, HTC (based in Taiwan), is a leader in the design of high-end smartphones and has designed a successful range of customized smartphones for European and U.S. operators. In China, Dopod is focused on the high-end market and has produced numerous phones with appealing features such as TouchFlo technology and innovative design. The company's selection of Windows Mobile as its main smartphone OS has also contributed to its success because Chinese consumers are familiar with Windows operating systems from their personal computers.

Since the middle of 2007, HTC has also been China's most enthusiastic supporter of Google's Android OS and released its first Android-based model -- the T-Mobile G1 -- in September 2008. Supporting Android is a solid strategy and will certainly drive further sales growth in China. Dopod also does

handset customization for China Mobile, which is helpful in improving its shipment volume. Figure 4 shows the key smartphone models Dopod will launch in 2009.

Figure 4. Key Dopod Smartphone Launches (2009)

Motorola's worldwide mobile phone market share has been declining since 2006 because of internal problems and a failure to follow developing industry trends. As of the end of 2008 its market share had slipped to a fourth-place 8.5%, below Nokia, Samsung, and LG. Motorola has not produced any compelling products since its RAZR and Ming series and has been slow to adapt to the popularity of GPS, music, and cameras in mobile phones. It has also abandoned Linux and reduced its software platforms to three, namely Windows Mobile, Google Android, and low-end real-time OS. However, the company has a new smartphone series coming soon and In-Stat believes Motorola will see the bottom in Q4 2009 and begin to regain market share in 2010.

By focusing on fashion and special texture ID design, Samsung and LG have seen strong market share growth in China's smartphone market. Moreover, both are working hard on producing Android-based models and customized phones for Chinese operators. LG will release the China Mobile-customized Ophone in Q3 2009 based on an OMS software platform from Google Android. This will be a big sales driver.

Personal computers makers such as , HP, Acer and Gigabyte have also recognized the potential of the smartphone market and have released several phone models. Consumers will be able to enjoy the benefits of a competitive smartphone market and a lot of fantastic smartphones in coming years. Design Trends There have been three distinct trends in smartphone design since late 2007: entertainment-oriented phones with large touchscreens, enhanced web browsers, and excellent user experience; business-oriented smartphones with QWERTY keyboards and office functions such as push mail; and phones that resemble feature phones but have more powerful multimedia and application capabilities. (See Figure 5.) Unlike in the US, smartphones with the look of a account for most of the sales growth in China and will continue to do so because they meet most consumer demands for

multimedia and applications but cost less than large-screen high-end smartphones. However, as prices fall and mobile broadband becomes available, high-end phones will increase market share in China.

Figure 5. Smartphone Design Trends

Smartphone Value Chain Analysis

Smartphone OS Market Trend Analysis Due to steady growth in Nokia smartphone sales and a sharp drop in Linux smartphone sales, Symbian retained its leading OS market position and even saw a small increase in 2008. The failure of Motorola is the main reason for the drop in Linux smartphone sales; Motorola is the most important supporter of mobile Linux, which is used on more than 70% of China's Linux smartphones. Following the completion of internal reform, Motorola plans to abandon the Linux platform and switch to Google Android for mid-range smartphones and to Windows Mobile for high-end.

Thanks to Dopod's and Samsung's steady sales growth, Windows Mobile gained 2.6% in smartphone market share to reach 11.6%. Windows Mobile is expected to sustain steady growth with the debut of Windows Mobile 6.5, which provides an improved user experience.

Figure 6. China's Smartphone Market Shares, by OS (2008)

Google Android is attracting an increasing number of smartphone makers due to its license-free strategy and abundant popular Internet applications and services from Google. Prominent European and U.S. operators such as , O2, and T-Mobile will release more than 10 Android-based models from HTC, Samsung, and Motorola in Q3 2009.

OMS is based on Android and was developed by Borqs Inc. In-Stat believes that China Mobile is fully behind OMS and that it is important part of the company's application and services strategy. According to China Mobile, Lenovo will launch the first Ophone for China's market in Q3 2009. Figure 6 shows the OS matrix that smartphone manufacturers use and how that changes.

Figure 7. Smartphone OS and Manufacturer Matrix

Symbian Nokia has bought out all of Symbian's other shareholders and is in the process of establishing the Symbian Foundation, which will provide the Symbian OS free to foundation members. Sony-Ericsson, Motorola, and NTT DoCoMo have agreed to contribute their proprietary UI/middleware (S60, UIQ, and MOAP(s), respectively) to the foundation, allowing it to provide a complete open mobile software system.

The foundation also plans to compete with other OSs such as Android by providing a unified and open mobile platform for smartphone manufacturers and developers and reallocating all the available resources. Its ultimate goal is to open decision. Symbian's board of directors has five members who share decision-making power equally; however, they believe the wisdom of the masses exceeds that of the wisest individual.

The foundation's most urgent task at present is to unify the various user interfaces and middleware. To this end, it plans to combine S60, UIQ, and MOAP(s) in a new middleware layer and conform the UI layer to Qtopia, a leading application development framework for graphic user interfaces that was also purchased by Nokia last year. These steps are critical for further development.

Figure 8. Symbian Foundation Offering

The Symbian Foundation plans to perform three Symbian platform releases based on differing customer needs: SDK, source code, and open decision. SDK is mainly for application developers while source code and open decision are mainly for handset manufacturers and operators.

The greatest risk of open source software is that it does not have a dominant stakeholder and therefore produces lots of branches; in part, this is why traditional mobile Linux failed. The Symbian Foundation and OHA are committed to resolving this problem by providing completely unified UI/middleware architecture, OS kernel, and source code.

To keep its leading role in the smartphone OS market, Symbian must strengthen the mobile Internet user experience and offer more services and applications. Nokia's Ovi Store and N-Gage mobile gaming platform will achieve this to some extent. With regard to the development ecosystem, however, Symbian has a smaller developer community and hence is in a weaker position than Windows Mobile and Android. Windows Mobile possesses abundant developers thanks to the popularity of Windows for personal computers, and Android is perfect for any Java developer.

Google Android Android is a software stack for mobile devices that includes an operating system, middleware, and key applications. It was initially developed by Google and later by the OHA. Since October 2008, Android has been provided as open source under an . With an Apache license, developers are free to add proprietary codes without submitting them to the OHA. As the initiator and the primary driving force, Google dominates the OHA and is leading the future development of Android.

Most of the Android source codes come from open-source communities, including OpenGL, WebKit engine, and SQLite. Without these mature modules, Google would not have been able to release an Android platform package so soon. Android's core is the Runtime, which consists of Java's virtual machine and some core libraries, and all applications, including core and third-party, are developed using Java running on Dalvik.

Figure 9. Android Platform Architecture

The mobile OS market has many more players than the PC market, where Microsoft Windows dominates. Symbian, Linux, Palm, Mac OS, and other real-time systems have their individual market niches and are to a certain extent closed to Internet service providers. By providing a free OS, Google intends to seamlessly extend its successful Internet services (search, maps, video, etc.) to a mobile platform.

In addition, a free OS with popular Internet services is attractive to handset manufacturers. Android's abundant Internet services and improved user experience will also promote the use of mobile data services and hence be welcomed by mobile operators. Google's market-leading position and brand influence are also important to consumer acceptance.

However, as a brand-new smartphone OS, Android is not as complete as Windows Mobile or other mature systems. Handset manufacturers must perform extensive development on hardware

adaptation, functionality and performance improvement, user interface, and application development. From another perspective, this provides room for handset vendors to differentiate; however, they still must conform to Android's developing standards.

In the second half of 2009, operators in Europe including T-Mobile, Vodafone, Orange, and O2 will release Android-based smartphone models from Samsung, HTC, Motorola, HuaWei, and LG. In China, handset makers including Dopod, LG, Lenovo, and Dell have already pledged to provide smartphone models based on OMS, a CMCC-customized Android platform.

Android's features include:

▪ An application framework enabling reuse and replacement of components ▪ A Dalvik virtual machine optimized for mobile devices ▪ An advanced browser based on the Webkit engine ▪ Optimized graphics powered by a custom 2D graphics library and 3D graphics ▪ SQLite for structured data storage ▪ Support for the media formats MPEG4, H.264, MP3, AAC, AMR, JPG, PNG, and GIF ▪ A rich development environment including a device emulator, tools for debugging, memory, and performance profiling OMS The Open Mobile Phone Operating System (OMS) is a mobile software platform for mobile devices developed by Borqs Inc. It is a localization and implementation of Android designed for the Chinese market. In-Stat believes that OMS is supported by the China Mobile Communication Corp. (CMCC) and that it will come with CMCC's applications and services pre-installed. Handset manufacturers including Lenovo, LG, Dopod, and HP have licensed OMS for Ophones, which are CMCC-customized smartphones. Android is not as yet a perfect mobile platform, but Borqs has worked to complete, optimize, and localize it for the Chinese market. Payment for an OMS license is royalty-based.

As an important part of its application strategy, CMCC will work hard to promote sales of Ophones, which is why tier-2 and tier-3 handset vendors are currently so active.

China Mobile’s first OMS-based smartphone, or Ophone, will be launched by Lenovo Mobile before the end of the year. The phone will integrate functions such as Fetion, mobile newspaper, mobile search, and intelligent learning. China Mobile’s other partners, including LG Electronics, Dopod, and HP, will also launch China Mobile-customized smartphones based on OMS this year.

There are two main reasons for China Mobile to develop Ophones in cooperation with device manufacturers. Firstly, mainstream handset manufacturers are leery of TD-SCDMA, China's

home-grown 3G standard, resulting in a lack of TD phones. China Mobile can leverage its strength to promote the development of the TD handset industry by building its own smartphone operating system.

Secondly, the key to success for mobile operators in the future Internet market will depend to a certain extent on their control of the mobile phone and the user interface: specifically, the ability to pre-install or restrain applications in mobile phones. China Mobile is already working on control of the user interface, and can look to Apple Inc. as a great example. Apple has built a relatively closed system, with relevant applications and services available to users only through Apple's exclusive pipe. The iPhone provides a very good user experience and has laid the foundation for Apple's successful app store. Google is promoting Android with the same goal: a smooth transition of services from Internet to mobile Internet.

China Mobile's strategy in this regard is to promote Ophone sales by different means, including marketing and subsidies. In-Stat predicts that half a million Ophones will be sold in 2009.

For the same reason, Nokia, China's largest mobile phone maker, has transitioned from a device company to an Internet and mobile services company as it attempts to duplicate its success as a handset maker in the era of mobile Internet. As such, China Mobile has no choice but to cooperate with second-tier Chinese mobile phone manufacturers such as Lenovo and LG. At present, product design and brand are the most important factors for Chinese consumers in purchasing mobile phones. However, we believe that China Mobile's promotions and subsidies will be an initial driving force of Ophone sales.

In-Stat believes that Dopod is the most suitable partner for China Mobile to produce Ophones; its parent company, HTC, has designed and manufactured high-end smartphones for operators in the United States and Europe and has an excellent understanding of mobile phone design trends and their importance in the Chinese market. In addition, HTC is a superior developer of Android phones. Cooperation with Dopod will also be a significant boost to China Mobile’s strategy of applications and services.

Windows Mobile Microsoft Windows Mobile occupies an important place in the high-end business smartphone marketplace because of its compatibility with the popular PC operating system, Windows. Users can easily synchronize with a Windows-based PC and the same e-mail accounts they use online.

However, although Windows Mobile is very popular in Europe and the U.S., its prospects in China are less rosy. Windows Mobile is primarily business-oriented and lacks the high-end multimedia and entertainment-oriented functionality beloved of Chinese consumers. In addition, Windows Mobile is a derivative of Microsoft Windows for mobile devices and the user interface and user experience are designed for PC users. This can be annoying for consumers who use mobile devices equipped with three-inch screens.

More positively, Windows Mobile 6.5, the latest version of the software, has an improved user interface and a richer Internet browsing experience (see Figure 10). It includes an improved touchscreen

interface, a newly designed home screen, and the latest Internet Explorer mobile browser. In addition, Windows Mobile 6.5 provide two new services: the My Phone service and Windows Marketplace for Mobile. The first allows users to store and manage personal information via a password-protected Web service. The second provides accessible mobile applications and can be accessed via both phone and Web.

Figure 10. Microsoft Windows Mobile 6.5 User Interface

Smartphone Chipset Platform Market Trend Analysis HuaWei K3 Smartphone Platform Following three years of development, Hi-Silicon, a HuaWei subsidiary focused on communications and multimedia semiconductors, has launched K3, a turnkey smartphone platform solution. The core of the K3 platform is the Hi3611, an application processor developed by Hi-Silicon. The platform supports a variety of cellular baseband processors, including NXP and MediaTek.

At present, K3 supports only Microsoft Windows Mobile, for which Hi-Silicon has completed porting and adaptation, modem integration, and Microsoft LTK testing. The K3 platform does much more work for handset manufacturers and design houses compared to traditional AP platform solutions and thus shortens product time-to-market to 3~6 months and dramatically reduces development costs. According to Hi-Silicon, only two hardware engineers and two peripheral software engineers are needed to bring a K3-based phone to mass production.

The grey market is usually the first testing ground for a new AP smartphone platform. Already, several unlicensed GSM/EDGE phones priced between US$140 and US$180 have appeared on the market, and over 30 handset manufacturers and design houses have licensed the K3 platform.

With the same industry design, an unlicensed Windows Mobile smartphone based on the K3 platform costs 30%~40% more than a feature phone based on MTK platform, a significant barrier to would-be purchasers of grey phones. Furthermore, a Windows Mobile smartphone doesn't offer any additional features for consumers primarily interested in ease of use and multimedia functionality. The popularity of Windows on the PC may boost sales, but that will not be enough. In-Stat anticipates that unlicensed Windows Mobile smartphones will gain a small share of the grey market but will not sell in any significant numbers.

To further develop, the K3 platform will need to cooperate with local brand-name players like Tianyu and to support more smartphone operating systems such as Android and OMS, while at the same time continuously working to improve platform stability and performance. Collaborating with HuaWei's device department to provide customized Windows Mobile-based smartphones for mainland operators in Europe and mainland China is another opportunity.

The key features of the K3 platform are as follows:

▪ A 460MHz ARM926EJ-S core ▪ Support for mobile SDR/DDR SDRAM ▪ Support for QVGA/WQVGA/VGA display ▪ Support for MPEG4/H.263/H.264/VC-1 QCIF/CIF/QVGA/VGA/D1 hardware decode @30fps ▪ Support for MPEG4/H.263 QCIF/CIF/QVGA/VGA encode @30fps

▪ Support for a three-megapixel image sensor MediaTek Smartphone Chipset Platform MediaTek, the leading baseband provider for local brands and the grey market, has released the MT6516, a smartphone chipset solution that combines an application processor and GPRS/EDGE cellular baseband. The MT6516 has cost advantages over smartphone chipset solutions such as HuaWei's K3 platform.

The new platform integrates an ARM926 processor core and support for multiple video codecs including MPEG4, H.263, and H.264, and also supports WVGA display resolution. At present, it supports only the Windows Mobile smartphone operating system.

In addition to completing Windows Mobile porting and adaptation, modem integration, and Microsoft LTK testing, MediaTek has worked to differentiate the MT6516's user interface. Smartphone makers who use this platform will provide consumers with an MediaTek-style user interface and a pleasant user experience. This should help increase consumer acceptance of Windows Mobile smartphones and promote sales of the MediaTek's chipset solution.

MediaTek refuses to provide the MT6516 solution to the grey market and only ships to local name-brand manufacturers. This ensures that Microsoft receives license fees and in turn offers solid support for software solution development. Collaboration between the two industry leaders will provide local brand smartphone manufacturers with cost advantages and ultimately promote China's smartphone market.

Drivers and Barriers

Lower Entry Will Fuel Market It seems counter-intuitive that Microsoft Windows Mobile, which has high license fees, is widely supported by smartphone manufacturers, while mobile Linux, which is free, is less popular. The reason is that although Windows Mobile uses a royalty-based business model, it features a complete smartphone software architecture that includes telephony, a media player, a Java engine, and a user interface. Mobile Linux, although free, must be heavily customized to become a complete smartphone software platform.

In addition, a complete software platform means shorter time-to-market, less upfront investment (mainly on engineering), and lower market risk for smartphone manufacturers. All are crucial in a rapidly changing smartphone market.

That said, the license-based business model and heavy upfront investment have set high market barriers for prospective entrants. Symbian and Android are therefore combining their respective advantages to offer a complete and royalty-free smartphone software platform. This will dramatically lower barriers-to-entry; the smartphone market will become more competitive and innovative, and prices will fall. Innovation may involve business models, industry chain, services and device convergence, or creating consumer need. In short, a more accessible market will dramatically fuel China's smartphone industry.

Before it combined the OS and the UI/middleware layer, Symbian was essentially closed to small- and medium-sized handset manufacturers, who were obliged to license the OS from Symbian and the UI/middleware layer from other vendors. Combing the OS and the UI/middleware will remove the biggest obstacle to adopting Symbian for these manufacturers. Figure 11 shows how Symbian has changed as a result of the Symbian Foundation; Figure 12 shows the differences between Android and traditional Linux.

Figure 11. Free Symbian Software Platform

Figure 12. Android and Traditional Linux Comparison

HuaWei's application processor and MediaTek's turnkey solution are also important in lowering market barriers. Both companies are concentrating on the Windows Mobile solution and have completed porting and adaptation, modem integration, and Microsoft LTK testing (Figure 13); in addition, MediaTek has worked to differentiate its user interface. They have also shortened product time-to-market and significantly reduced development costs, which should draw more local and grey-market manufacturers into the smartphone market.

Figure 13. MTK and HuaWei Turnkey Smartphone Solution

3G Brings Higher Bandwidth 's launch of pre-commercial WCDMA services in 55 cities on May 17th means that all three operators in China now have commercialized 3G mobile communication services using individual standards. This will markedly improve mobile bandwidth and user experience with mobile Internet. Table 1 outlines the network deployment and devices strategy of China's operators and Figure 14 provides subscriber forecasts by operator from 2009 to 2011.

Table 1. Operator 3G Network Deployment and Devices Strategy

Figure 14. China's 3G Subscriber Forecasts, by Operator (2009–2011)

In-Stat's most recent survey of mobile Internet users reveals that low data rates are the principal source of discontent in using mobile Internet applications, followed by slow phone response (Figure 15). Higher bandwidth, however, will attract more subscribers to these applications and promote sales of more powerful, larger-screen smartphones.

Figure 15. Main Problems Using Phone-Based Mobile Internet Applications

Thriving Mobile Applications a Significant Driver Internet applications are migrating to mobile Internet, and China's most mature Internet applications -- web browsing and instant messaging, which works well with low bandwidth and phone performance -- have already made the transition. In terms of market penetration, in fact, the level of usage is almost the same. Figure 16 lists the most commonly used mobile applications.

Figure 16. Most Commonly Used Phone-Based Mobile Applications

As part of the migration process, Internet applications have combined with the unique features of mobile Internet (portability, mobility, and ID recognition) to produce applications such as location-based

services (LBS). Such applications expand and enrich user experience and are certain to attract consumers to smartphones that make full use of them.

Usage frequency and user viscosity in China's LBS market, however, remain low. Among the reasons for this are poor network bandwidth and inferior user experience. Another reason is that these services, which include online navigation, map search, and local information search, are by nature used intermittently, usually when the user is in an unfamiliar environment. Bedo, a social network built around location-based services, is one possible model for overcoming this limitation. It may increase both usage and viscosity and lay the basis for further value-added services and increased revenue.

Another model is the iTunes app store, which has become an important factor in promoting sales of the iPhone. Apple has announced that more than 1.5 billion applications were downloaded in the store's first year. The app store now has more than 65,000 applications and over 100,000 registered developers. Its success is built around the unique pipe that the iPhone and iPod provide to application developers. Developers are thus motivated to develop additional high-quality applications, further promoting iPhone sales. Battery Life Lags Mobile phones continue to expand functionality, but battery life has not kept pace. Battery development lags that of other phone-related technology such as communications, semiconductors, manufacturing, and display, and has become a significant constraint on the development of mobile Internet and multimedia applications.

A mobile phone consumes power in three principal ways: core processor computing, radio frequency, and display green. In the pre-3G era, core processor computing performance was low and screen size was small. Phones, whether feature phones or smartphones, were used mainly for voice and text . With less intensive use, battery life was less of an issue.

Now, however, mobile computing power has significantly increased and display screens are becoming larger with the rapid development of semiconductor and communications technology. Mobile bandwidth and mobile Internet applications are enjoying explosive growth and providing consumers with improved user experience, but they greatly increase battery consumption. At present, consumers can send and receive e-mail at any time and any place, using mobile instant messaging 24 hours a day, listen to music, surf the Internet, watch videos, and make video calls, all on a four-inch display screen. To do so, however, many users are obliged to carry spare batteries and even charge both daily. This is a considerable barrier to the growth of the smartphone market.

The battery industry has been trying to innovate in recent years and has had some success with solar battery technology and fuel cell technology. Battery technology for mobile phones, however, is constrained by space, safety, and other considerations, and it will take a very long time for mobile phone battery life to achieve the revolutionary breakthrough that is urgently needed.

Market Forecasts

Table 1 provides forecasts for smartphone shipments in China from 2009 to 2013. According to In-Stat's research, the Chinese smartphone market will grow by 25.7% in 2009 and smartphone shipments will reach 73.6 million in 2013. The smartphone's share of total handset shipments in China will increase from 19.3% in 2009 to 31.5% in 2013.

Table 2. China's Smartphone Market Shipment Forecasts, 2009–2013 (in Millions)

Figure 17. China's Smartphone Market Shipment Forecasts, 2009–2013

Methodology

Information contained in this report was obtained through a combination of primary and secondary research techniques that included the following:

In-person interviews with:

▪ Smartphone OS vendors in China ▪ Top Chinese chipset manufacturers ▪ Top Chinese mobile phone manufacturers The following were the key issues addressed:

▪ China’s smartphone OS market ▪ China's smartphone chipset solution market ▪ Mobile Internet use and behavior in China ▪ Growth in Chinese smartphone shipments Secondary research:

▪ Analysis of In-Stat’s proprietary market information and verification with other industry analysts ▪ Analysis of information reported in secondary sources such as websites, trade journals, newspapers, and magazines Consumer data for this report was collected via a computer-assisted telephone interview survey. A total of 1,666 responses from China's mobile Internet users were collected in May 2009. Respondents came from 10 first-tier cities, including Beijing, Shanghai, Guangzhou, and Shenzhen. There were no quotas for any particular demographic measurement; respondents represented a wide variety of industries, job titles, and company sizes.

It should be noted that in this report, the exchange rate between US dollars and RMB is set at 1:7 for convenience of calculation.

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Report Summary

Smartphone shipments in China grew 30% to 23.6 million in 2008 despite China's uncertain economy and overall stagnation in handset shipment growth. Mobile Internet applications, GPS, and multimedia functionality have been the most important drivers of this growth.

In-Stat estimates that the compound annual growth rate of China's smartphone market will be 25% throughout the period 2009 to 2013 and that the next wave of smartphone market growth will be driven by lowered barriers-to-entry on both the OS and chipset platform solution sides. This report examines the changing dynamics of China's smartphone OS and chipset platform markets and analyzes how these will drive the smartphone market in coming years. Details of other significant drivers are also provided. This report includes: ▪ 2008 market share for China's smartphone market by vendor and OS ▪ New smartphone models and product design trends ▪ In-depth analysis of smartphone OS market trends, especially with regard to Android, Symbian, and OMS ▪ An outline of the current dynamic changes in the smartphone chipset platform market ▪ A list of market drivers ▪ Market forecasts through 2013