COTTAGE MOBILE PHONES IN CHINA
Linnaeus University School of Management and Economics Bachelor Thesis
Advisor: Lars.Behrenz
Examinator: Dominique Anxo
Guan
gning Cai
TITLE: COTTAGE CULTURE IN CHINA-- FACTORS OF ITS EXISTENCE DATE : 2010-06-04
COURSE: 2NA00E, THESIS IN ECONOMICS, 15 ECTS AUTHOR: GUANGNING CAI
ADVISOR: ASSOCIATED PROFESSOR, LARS BEHRENZ EXAMINER: PROFESSOR, DOMINIQUE ANXO
KEY WORDS: COTTAGE MOBILE PHONE FACTORS OF EXISTENCE PROPERTY RIGHTS DEMAND AND SUPPLY
PRICE PLAGIRIAZE ABSTRACT:
Nowadays, there is a new product of mobile phone called cottage mobile phone in the Chinese mobile phone market. And it quickly blows a cottage fashion in China these recent years. At the beginning of the paper, I state the market situation of both cottage mobile phone and branded mobile phone. Then I start to analyze the possible reason for consumer whether to buy the cottage mobile phone or not. After that I confirm these reasons by conducting a survey, that through the mobile phone consumers’ views I find out the main reasons for people purchasing cottage mobile phone and not to do so. The purpose of this paper is to tell what the cottage mobile phone companies should do to have a long term development and also what can branded mobile phone companies learn from cottage mobile phone companies.
T
ABLE OF CONTENTS1. INTRODUCTION
---51.1. background---6
1.2.purpose---8
1.3. questions---8
1.4. limitations---8
1.5 .data sources---9
1.6. keywords---10
1.7. methods---10
2. DATA PRESENT
2.1. market size and growth---112.2. comparison between cottage mobile phones and branded mobile phones--13
3. THEORETICAL FRAMEWORK---15
3.1. reasons for companies producing cottage mobile phones---15
3.2. reasons for people consuming cottage mobile phones---18
3.3. weakness of cottage mobile phones---20
4. EMPIRICAL TEST---26
4.1. empirical evidence for producing cottage mobile phones---27
4.2. survey about cottage mobile phones---28
5.CONCLUSION---34
6.SUGGESTIONS---35
APPENDIX---42
REFERENCES---45
1.Introduction
Look at the picture below, you might think that this is the Apple iPhone mobile phone advertisement.
HI-PHONE VS IPHONE
Above is a new launched cottage mobile phone. After reading the illustration of it, perhaps you will be feeling amazing about it not just because its appearance.
"Powerful Hi-phone! 99% highly imitation of iPhone. "This is the slogan of this phone. From the exterior view, screen and, shape, and operating system are quite like Apple iPhone. In addition, it also has the capability of touch operation, the level sensor adjustment function which Apple iPhone are proud of. What’s more interesting is that this phone can also replace the batteries, put two SIM cards at the same time which for Apple iPhone, is not available yet. We can easily find that the product description has multiple wrong words such as "high end" written as the
"high-off." In addition, Internet users said that this phone is just the overall appearance similar to the iPhone, but the screen effect can not as good as Apple and web pages can not be turned or moved like apples. Finally, compared to Apple's iPhone current price 4,5 thousand , this Hi-Phone "for just": 600 Yuan. 1
1. http://www.ooyaa.com/redianzixun/253.html
1.1 background
Mobile phone industry was once a high-tech industries, a representative of high-tech industries, so that countries attach great importance to the development of mobile phone industry. After years of development , some countries have created a number of mobile phone brands such as Nokia in Finland, South Korea's Samsung and so on.
China's mobile phone industry, even though was started rather late, after years of effort we have made great progress. However, the Chinese domestic mobile phone is not optimistic: research and development funds are not enough, mobile phone sales are sluggish, mobile phone property rights protection is weak, and lack of world- known brand.
What is cottage mobile phone?
“Cottage” in China means small village that can hardly be governed by government.2 As escaping from government’s management, no need to pay tax, no need to spend lot of money on doing research, no advertising fee, a new industry called cottage mobile phone emerged.
China’s cottage mobile phone ----started with imitating famous branded mobile phones : not only because of taking advantages of the mature technology of branded phones, it also have variety kinds, lower price, delicate packaging and many
attractive features such as large-screen, touch screen and handwriting function, large volume, digital map, dual SIM card dual standby and so on. Some features are more humane, more in line with Chinese custom. Cottage phones as a strong power quickly occupied the broad market in China, forming a "Cottage economy" trend. 3
2. http://zh.wikipedia.org/zh-cn/%E5%B1%B1%E5%AF%A8
3.http://www.myistop.com/blogs/lqbatteryshop/new-york-times-said-chinese-cottage-machine-really- profit-margins-high-200
History of cottage mobile phones
Through the data presentation above, we can definitely say that cottage mobile phones are quickly occupying the whole mobile phone market and still increasing at a incredible rate compare to the branded mobile phones. All of these innovations came from a Taiwan Semiconductor Design Company called MediaTek who invented a method reducing the production costs and simplify the production procedure.
MediaTek is a leading fabless semiconductor company for wireless communications and digital multimedia solutions. MediaTek, founded in 1997, is headquartered in Taiwan and has sales and research subsidiaries in Mainland China, Singapore, India, U.S., Japan, Korea, Denmark and England. 4
The experts in Media Tek used a total control technology, invented a circuit board, without spending a lot of money, you can put a variety of electronic functions of the chip together which providing a platform for producing low price mobile phones for those new created companies.
Thus, a new industry developed----cottage mobile phone industry. Companies buy software with Media Tek chips, then they get other parts of the mobile phone from providers, and finally they all send to a factory and get assembled. At that time, due to the regulations of mobile phones, cottage mobile phones are illegal because all
4. http://www.mediatek.com/en/index.php
the mobile phones need licenses. Before 2007, because of the China’s system of implementation of mobile phone licenses, the cottage mobile phone has been in an
embarrassing position as non-regular phones. The cottage phone raised in a "gray"
zones only in black-market. But the situation changed in the October of 2007 completely.In accordance with government can sometimes improve market outcomes, China canceled the license system for mobile phones, cottage mobile phone’s illegal impression gradually receded. Cottage phones transformed into regular cell phones finally.
1.2 Purpose
Through presenting the recent cottage mobile phone market situation in China, I intend to find the factors influence people producing and purchasing cottage mobile phone and the weakness of cottage mobile phone industry. According to the data and results of mathematics operation, we can explain the result with the fact now in China as well as coming up with some specific constructive suggestions.
1.3 Questions
Cottage culture is newly developed in China. In this paper I want to discuss questions about:
1.Why do producers produce cottage mobile phones?
2.What is the weakness of cottage mobile phones?
1.4 Limitations
There are some limitations of the data. The survey I did was not 100% accurately reflected the whole cottage mobile phone information due to the limitation of the interviewers. Interviewers are mainly in the age between 16-25, which cannot well explain the whole attitude toward cottage mobile phones. And all the interviewers are somehow have a link to me. So there is a result bias for the survey. It can not represent the true situation of the young generation. What is more, in common sense there are a lot of factors affect the purchase of cottage mobile phones, such as
the low price, variety of functions and so on. But it is hard to measure all the factors which means in this paper I just choose few of the most important factors to analyze.
So do the other issues, I just pick the main factors that I think it should be important to do the survey.
1.5 Data
The data comes from two ways. One is from a famous investigation company, about situation of China’s Cottage mobile phone market .There are two data sources: 1) First-hand research: mainly on industry-related vendors, and user interviews and surveys. 2) Desk study: mainly through the Internet sites, trade journals and newspapers, previous company research data, and its proprietary channels of database. The other one is from the investigation of my randomly interviewing 100 consumers which including students, unemployed people, white collar and blue collar and so on who have the ability to purchase mobile phones. And I also contact with some mobile phone sellers and ask them some questions about cottage mobile phones. The data includes the price of their mobile phones, preference of design, preference of brand, preference of function, preference of utility, after-service, costs of mobile phones and cottage mobile phones. Details are in the appendix.
1.6. Keywords
Cottage mobile phone branded mobile phone
Income, price and consumption preference plagiarize Quality after-service
1.7. Method
In the beginning I introduced the new phenomenon about cottage mobile phones.
Then from economic point of view, I presented the reasons for producing and purchasing cottage mobile phones, factors for its market demand and why do some people don’t want to purchase cottage mobile phones. Through using data of cottage mobile phones market share and its selling statues combining with interviewing some Chinese consumers’ attitude towards it, I answer the purpose for producing and consuming cottage mobile phones. Rather than criticizing about it, I think cottage mobile phone industry has both advantages and disadvantages. So I give some suggestions to cottage mobile phone industry and the branded mobile phone industry and hope they have a better development.
2.Data presentation
2.1 Market size and growth
Table 1 2007-2008 China's cottage mobile phone industry scale, market sales and production value
2007 2008 Growth rate
Market sales(Hundred
million)
247.3 295.0 19.3%
Production value 624.3 714.6 13.4%
Data source：Bayes , 2009，05 5
5. http://www.bayesconsulting.com/yjbg3j.aspx?nid=39&cid=3
Graph 1:2007-2008 China's cottage mobile phone industry scale, market sales and production value
Data source：Bayes , 2009，05 6
The overall of 2007-2008 China's cottage mobile phone market: Sales of cottage mobile phones in 2008 were up to 29.5 billion Yuan. There is a huge increase in the market sales of cottage mobile phone in 2008, increased 19.3% compared to 2007. At the same time, the whole cottage mobile phone industries output value in 2008 was 71.46 billion Yuan, increased 13.4% compared to 2007.
6. http://www.bayesconsulting.com/yjbg3j.aspx?nid=39&cid=3
2.2 Comparison between cottage mobile phones and branded mobile phones
Table 2: 2007-2008 the market share and the yield of Chinese branded and cottage mobile phones
2007 2008
category branded cottage Branded cottage yield(million) 548.6 137.9 559.6 148.8
Growth rate - - 2.0% 7.9%
market share 74.9% 25.1% 73.5% 26.5%
Data source：Bayes , 2009，05 7
From the industry point of view, the output of branded mobile phones in 2008 reached nearly 560 million, increased 11 million compared to 2007. But the growth rate of Chinese branded mobile phone industries in 2008 had a marked decline in the growth rate as it was only 2.0%.
While the cottage mobile phone increased 10.9 million in 2008 compared to the output of 2007 and its production growth rate of was 7.9%, which is almost 4 times
7. http://www.bayesconsulting.com/yjbg3j.aspx?nid=39&cid=3
of the growth rate of branded mobile phones. But the market share of cottage mobile phones wasn’t as ideal as the growth rate, it was just increase from 25.1% in 2007 to 26.5% in 2008.
Then we check the sales volume situation of branded mobile phones and cottage mobile phones.
Table 3: 2007-2008 China's Branded mobile phone sales conditions
2007 2008
Product category: branded cottage branded cottage Sales volume(million) 148.1 44.5 160.4 51.5
Growth rate - - 8.3% 24.3%
market share 76.9% 23.1% 75.7% 24.3%
Data source：Bayes 2009，05 8
From the market point of view, the 2008 Chinese branded mobile phone sales volume was 160.4 million in total, increased 11.9 million compared to 2007. Its growth rate also had a marked decline which growth rate was only 8.3%.
8. http://www.bayesconsulting.com/yjbg3j.aspx?nid=39&cid=3
In 2008 the cottage mobile phone sales volume increased 7million from 44.5 to 51.5, but the growth rate increase as much as 24.3% compared to 2007, even though the market share was still just 24.3%, it showed a strong potential in future market.
From the data above, we can tell that cottage mobile phone, which was just started recent years, had a very dynamic trend to develop. The cottage mobile phones’
yield, sales and the sales volume are smaller than the branded mobile phones’, but
the growth rate of cottage mobile phone was much bigger than the branded mobile phones no matter the yield or the sales volume. What leads to the production and the consumption of cottage mobile phones? We will discuss about it in later part.
3. Theoretical framework
From the data in the second part, we can tell that the production and consumption of cottage mobile phones is increasing year by year. Just since 2007, cottage mobile phones suddenly occupied the mobile phone market and increased either in the sales, production yield and growth rate. What’ more surprise people are the growth rate of production yield of cottage mobile phone was as high as 26.5% while the branded mobile phones only got 2% during the financial crisis in 2008. 9
In general, when a company decides to produce a specific product, they take lots of factors into consideration:
9. http://bayesconsulting.com/en/yjbg3j.aspx?nid=39&cid=3
3.1 From market supply side, companies produce cottage mobile due to:
a. It is profitable
Production cost: Actual cost plus depreciation charges for the capital equipment that be used in production process. (Robert S.Pindyck & Daniel L. Rubinfeld,
Microeconomics, 7th edition)
Specifically to say, MediaTek undertake most of the research work to develop motherboard of cottage mobile phones, but the research and development cost can be shared by cottage mobile phones companies who can produce 100 to 200 million phones per year.10 Due to the motherboards can be sold to several cottage mobile phone companies, thus costs and risks are dispersed.
Cottage mobile phone companies only require a small amount of capital investment mainly for shell mold and parts procurement, usually a few hundred thousand to several million. And because of the MediaTek program, the time for creating a new phone is shorten, far more reducing the amount of funds using throughout the industrial chain.
What is more, cottage mobile phones don’t spend much money on brand and
10.Pan Jiutang, Analysis: Cottage industry is a virtual enterprise http://it.sohu.com/20090313/n262770581.shtml
product promotion which means they spend much less money on advertisement compare to branded mobile phone companies. This also saves lot of production cost.
Meanwhile, even though cottage mobile phone in the market can be sold at a low price, the whole mobile phone market can trade a huge amount of cottage mobile phones which provide the cottage mobile phone producers the advantages of big sales volume. In order to fulfill the goal of big sales volume, cottage mobile phones usually have more flexible production designs. The cottage mobile phone producers concern about market trend and fashion trend which helps them produces more creative designs. Cottage mobile phones are more likely to satisfy all kinds of demand compared to branded mobile phones. 11Thus although the profit for each cottage mobile phone is not much, producers still want to produce cottage mobile phones
because the more cottage mobile phones are sold, the more total revenue they can get. They only can win on the sales quantity of cottage mobile phones.
Producers are producing goods only on the condition that this activity is profitable.
(Robert S.Pindyck & Daniel L. Rubinfeld, Microeconomics, 7th edition )And its profit equals total revenue minus total cost. They continuously keep lowering the
production cost and increasing the total revenue in order to get profit maximizing.
When it comes to cottage mobile phones, the total cost is low and the total revenue is relatively impressive through the data presentation part. Therefore, the cottage mobile phone industries can be thought of profitable which drives lots of people producing this kind of good. In the empirical part, we will prove it by roughly calculating the profit of the cottage mobile phone industries.
11.Pan Jiutang, Analysis: Cottage industry is a virtual enterprise http://it.sohu.com/20090313/n262770581.shtml
b. High production technology doesn’t acquire much
There is almost zero high techniques needed during the production of cottage mobile phones for the companies. The motherboards are bought from Media Tek, the only work for companies to do is to find a place to assemble the different part of the cottage mobile phone and design different appearance.
c. Related products price is high
When there is a new high end branded mobile phone launch the Chinese market, Chinese consumers cannot afford it considering their low income, while they are very eager to own it. Hence some consumers may want to own the similar products with a
lower price and that it the reason why the cottage mobile phone products have their market. Compare to the branded mobile phones, cottage mobile phones are much cheaper overall. Due to the lower production cost and little cost for promoting the products, cottage mobile phones have a low price in the market. Producers are good at catching the consumer psychology. And this leads to the emergence of cottage mobile phone.
d. Government policies and related laws have weakness
In the October of 2007 Chinese government canceled the license system for mobile phones.12 This news makes a huge change that producers are allowed to produce cottage mobile phones without a license for producing mobile phones. Anybody can produce mobile phone which offers an opportunity for the producing of cottage
12.http://www.gov.cn/zfwj/index.htm
mobile phones. And talking about the laws about plagiarizing problem of cottage mobile phones, yes, we do have some laws about the plagiarizing of patent design. I have put the relative laws in my empirical part. Cottage mobile phone companies would rather take the risk of being charged and pay for the fines than giving up the profit that producing cottage mobile phone brings. Because they know the fines are just a small amount compare to the profit they can earn from cottage mobile phones and in fact, there are really few people putting forward charges either because the Chinese patent protection awareness is weak and the punishment is not serious or the low efficiency of Chinese court: appealing time is too long and too costly.
Then comes to the Chinese own problems. Most of the cottage mobile phone companies are facing the problems of evading tax and this is quite common because producers don’t even to register that they can produce mobile phones. 13Thus lots of people produce cottage mobile phones secretly and they won’t pay tax for producing them. And the weakness supervise process and corruption phenomenon are quite normal in small cities in China which give cottage mobile phone companies much convenience to lower their production cost.
3.2 From demand side: people consume cottage mobile phones due to:
a. Price is low
The price of a mobile phone will affect its sales. The cheaper the mobile phone is , the more it can be sold. As we have discussed before, the production cost is quite
13. http://it.sohu.com/20090313/n262770581.shtml
low for the cottage mobile phone producers. And thus the price positioning of cottage mobile phones cannot be like branded mobile phones. Cottage mobile phones are sold at a quite cheap price. And I have to admit that cheap price may have lots of quality and service problems, but there are some people just want to buy something that is really cheap regardless the quality and service guarantee. All they think about is cheap price. In my empirical part there are 15% respondents used cottage mobile phones and 62% respondents have friends using cottage mobile phones. About 65% respondents choose the cottage mobile phones because they are cheap. These numbers can show that the price do affect people choices toward cottage mobile phones.
b. Income is low
According to Milton Friedman(1957), income is the basis of consumption. If there is no income, there won’t be any consumption at all. Income includes currency income and material income which are used to exchange in order to get what people want.
Income decides consumption which is already proved that generally consumer will consume more when they have a higher income and will consumer less when they have a lower income.
Consumers try to maximize the utility when they are purchasing goods and the utility has to fit their budget constraints which are determined by their income and prices of the goods. They can only purchase goods that the prices are within their purchase ability, not out of it. Thus income and price both play important roles in consumption behaviors of consumers. China's per capita standard of living is not high. China's GDP per capita income in 2008 was only 3,313 U.S. dollars 14, which means a relatively high price of branded
14.National Bureau of Statistic of China : http://219.235.129.58
mobile phone can not be afforded by the general poor people in China. Comparing the expensive branded mobile phones, the cheap cottage mobile phone turned out to be the best choice for those low-income people.
c. Preference
Compare to branded mobile phones, some cottage mobile phones have more kinds, more functions and more special features such as some unique design. Cottage mobile phones are good at fulfill different person’s preference. And because there are lots of choices for consumers in the cottage mobile phone market, there are a certain amount of people purchasing cottage mobile phones. In my survey, although
there is a data selection bias, there are still 19% people prefer cottage mobile phones due to the appearance, functions and kinds.
d. Attitude toward cottage mobile phone is supportive
Oligopoly is a market that only a few companies compete with each other and hard for other new companies interring. Firms have extensive amounts of power and may even collude to set prices, which is illegal.( John Sloman & Kevin Hinde, Economics for business, 4th edition) For the consumer this means high prices accompanied by the possibility of a low quality product. It could be argued that it ends up being a less competitive market as smaller firms find it impossible to compete with these brand- established firms
Consumers are interested in the cottage mobile phones because it originates from China and broke the oligopoly market15 of few foreign branded mobile phones
15. http://www.weaseek.com
governing a whole mobile phone market. The mobile phone market becomes more competitive. Therefore consumers would like to have a try and purchasing cottage mobile phones in order to support domestic industries.
3.3 Weakness of cottage mobile phone
There are four main ways to judge whether the product is good or bad: Technical standards, quality standards, design characteristics and service characteristics. (John Sloman & Kevin Hinde, Economics for business, 4th edition). These are all non-price competition factors that decide the products’ development. Except cottage mobile phones have good design characteristics, their quality and service is quite annoying some time.
a. Bad quality
In the empirical part, the survey showed the result that bad quality is the biggest problem of cottage mobile phones. Quality of a product will decide its durability and reliability. Of course people would love to buy product that is in good quality due to its long lasting use feature. But actually, quality of cottage mobile phone cannot be guaranteed.
The cottage mobile phone market is a imperfect information market. So it is natually to have quality problems. There are three types of products (Akerlof,George A,1970):
1) Search goods: products that we can tell the quality through observation. 2) Experience goods: products that only when we buy them, then we can tell the quality after using them 3) Credence goods: products that even we buy them, we still may not fully know the information and cannot tell the quality.
Cottage mobile phones belong to the mix of experience goods and credence goods.
So when we are purchasing cottage mobile phones, we are facing terrible
asymmetric information. Salesmen just encourage you to buy regardless telling you the weakness of the cottage mobile phone and sometimes they may over exaggerate the functions of the mobile phones. Customers cannot get to know the information of the cottage mobile phones, and it is much cheaper than the same level branded mobile phones, which is easy to persuade the customers to buy the cottage mobile phones. And when they are really using the cottage mobile phones, it is too late to return them back because it is the feature of cottage mobile phones----quality cannot be guaranteed.
These may finally cause market failure by continuously trading low quality cottage mobile phones, which may drive out the good quality mobile phones. About this problem I will present in the later part of the paper.
b. Bad after service
After-service is an important factor that affects people making decisions on
purchasing goods right after the quality of the products. ( John Sloman & Kevin Hinde ) In my empirical theory, it just confirmed this standpoint. About 27% of people think they don’t want to buy cottage mobile phones due to the poor after-service.
After-service is including the activities such as installation, repair and teaching or training of using products. This aspect is directly connected with the support and backup given to the customer after selling the products.( John Sloman & Kevin Hinde, Economics for business, 4th edition).
Cottage mobile phones don’t have a completely after-service system as branded mobile phones do. They are more likely a disposable trade that after selling the products, no more responsibilities for the cottage mobile phone salesman or
companies. Therefore, customers have to pay amount of money to repair them when the phones are broken. It is always too costly for the customers to repair cottage mobile phones and hence it affects people making decisions on purchasing cottage mobile phones.
c. Plagiarizing problem
The survey I conduct shows that the plagiarizing problem of cottage mobile phone is a serious factor that has already notable affected its sales. There are a certain
amount of people don’t like cottage mobile phones because of their plagiarizing problems.
From the property rights aspect, as we learned before, through personal contacts, reverse engineering or industrial spying, local mobile phone companies can learn about the products and technologies brought in by foreign mobile phone companies such as Nokia or Samsung and so on. This kind of imitation is more likely to occur in countries where the protection of intellectual property rights is insufficient like China. Chinese imitation of foreign goods is known to all and spread over all kinds of products, from luxury goods to even the mobile phones. The cottage mobile phone is facing huge risks of paralyzing other companies’ products.
There are 3 types of cottage mobile phones: 1) totally copy branded mobile phone 2) use or imitate well-known logos and trademarks 3) imitate the design elements of branded mobile phone 4) creative design 16
(1) (2) (3)
(4)
The first kind of cottage mobile phone is highly imitation of branded mobile phone.
Whether it is infringement of design patent should be decided by whether the company has a valid design patent in China. 12As long as the branded mobile phone has a valid design patent, Chinese cottage mobile phone faces the risks of plagiarizing and may be charged. But not all the branded mobile phones have applied the design patent, so cottage mobile phone may not be charged in this case.
16. Bian Yongjun, Zhang Qiuyue: Analysis of plagiarizing phenomenon of cottage mobile phone http://www.rucipr.com/ArticleView.aspx?id=841#
While in the second case, when the cottage mobile phone unauthorized use of well- known product specific name, packaging, decoration, or use well-known products with similar names, packaging, decoration, resulting in confusing them,
then there will be a risk of suspicious of the unfair competition. 17
The third type of cottage mobile phone is hard to judge whether it is plagiarizing.
Determine whether it is infringement is to compare the picture of the licensed product and the imitating product. The principle is: After overall observation, consumer is difficult to see both differences, then product design for the overall visual effect is not significant, which means the latter one is plagiarizing. 17
The last kind of cottage mobile phone is more reluctant to be charged by plagiarizing.
Judging from the standards of design patent infringement, we first examine whether
the infringing products and patented products belong to the same or similar products. If not, does not constitute infringement.12 Thus when the cottage mobile phones imitate other unrelated kind of products, it is legal. But using a patented products’ trademark on it will be a suspicious of trademark infringement. 17
d. Averse selection: negative future for the cottage mobile phone industry
Adverse selection: A kind of market failure that too much low quality products and too little good quality products are sold at a single price due to asymmetric
information. (N. Gregory Mankiw, Principles of Economics, 5th edition)
17.CNIPR: China Intellectual Property Net, http://english.cnipr.com/cnipreng/
From the cottage mobile phone’s own case, with more and more people join in the producing cottage mobile phone team, the market environment has been worse with severe price wars striking on it. The result is that the cottage mobile phone market will be overload and crash.
On the basis of "bad money drives out good money" (Akerlof,George A.1970)in economics, many people will use low-price cottage mobile phone to replace the branded phone which leaves no space for regular branded vendors to survive. When that situation happens, low price, low quality products and services, lack of research spirit of cottage mobile phones will dominate the phone market. And undoubtedly it is a nightmare for the domestic mobile phone industry and consumers. The industry will remain operating at a low level state and the consumer will feel very difficult to enjoy the new technologies and new applications. Cottage mobile phones will
destroy the current production and consumption environment of mobile phone industry.
4. EMPIRICAL TEST
4.1. Why do people produce cottage mobile phone?
To answer this question, let’s see how much profit that a cottage mobile phone producer can earn.
This is a survey that conducts by New York Times about Chinese cottage mobile phones production costs.
Table 4: production cost of a cottage mobile phone
Data source :http://www.nytimes.com/2009/04/28/technology/28cell.html
We can see from above, the cost of producing one cottage mobile phone is just 39.56 US dollars which is unbelievable low.
Also from the graph above we can see that the most expensive parts in cottage mobile phone is the main board which costs 20.59 US dollars. But this main board ---the most hi-tech part in cottage mobile phone, is bought from Media Tek. Thus, for the cottage mobile phone producers, the research and development cost is almost
zero. This shows that producing cottage mobile phones don’t need any high techniques as I mentioned in the theory part. As long as you purchase the main board from Media Tek, then anything else just some appearance design and send them to get assembled. Production cost is low.
Then let’s go through the Chinese laws toward design patent. The laws stated:
a. Infringement of design patent should be decided by whether the company has a valid design patent in China.
b. Unauthorized use of well-known product specific name, packaging, decoration, or use well-known products with similar names, packaging, decoration, resulting in confusing them,
there is suspicious of the unfair competition.
c. After overall observation, consumer is difficult to see differences between two products, product design for the overall visual effect is not significant, which means one of them is plagiarizing.
d. If products are using a patented products’ trademark on it, it will be a suspicious of trademark infringement.
From any aspects, cottage mobile phones are facing risks toward plagiarizing. But producers would rather break the laws than giving up the huge profit given by producing the cottage mobile phones. The main reason for this phenomenon is the Chinese laws about protecting intellectual property rights are not strict enough. The punishment measures are too weak.
4.2 Survey about cottage mobile phones
In the second part, I conducted a market research about the consumers’ attitude toward cottage mobile phone. I made a questionnaire basing on the information I want to know about the cottage mobile phones and the data I would use in the thesis. It includes the initial factors people would buy mobile phones, differences
that the consumers think between branded mobile phones and cottage mobile phones, their attitude toward cottage mobile phone now and the future, the problems that cottage mobile phones have and so on. And this survey was conducted only in China.
I sent out the questionnaire on May 1st to all the people I knew in China through the internet and asked them to fill the questionnaire. After filling the form, they sent it to me by email. The feedback was much better than I expected. I intended to get 100 replies, but in fact I got 194 replies in 1 week. My friends helped me to send the questionnaire to people they knew, thus I got questionnaires from people I knew and people I don’t know which is more likely to be a random database. Even so, there is still a bias in the data selection. All the people are somehow have a connection with me, thus the result cannot fully reflect the whole market situation. And the respondents were mostly in the age ranging from 16 to 25. There were only less than 10% of the respondents not included in this age. Therefore, I excluded those data out of the age 16-25 which means my research was focus on the young generation, studying their consumption behavior in purchasing mobile phones. I randomly picked out 100 replies from my database (exclude age out of 16-25) as my informant as follow graphs.
The number of effective access object questionnaires is 100, including 45 males, 55 females.
- 15% OF RESPONDENTS USED THE COTTAGE PHONES.
- 37% OF THE RESPONDENTS CONSIDERED THE DEVELOPMENT OF COTTAGE PHONES UNCERTAINTY
- 36% OF RESPONDENTS CONSIDERED THAT THE COTTAGE PHONES WITH PROSPECTS.
- 62% OF RESPONDENTS HAVE FRIENDS USED A COTTAGE.
Graph2:The initial factors when consumers buy mobile phones:
From the survey result above, we can tell that when consumers buy mobile phones, 32% prefer to care about the quality of the mobile phone, 24% prefer its function, 19% focus on its appearance, and 11% care about the price. Only 7% really pay attention to the brand and 7% emphasize the after-service of the mobile phones.
From this graph we can see there is a result bias. Due to the respondents are young people that most of who don’t have income of their own. They spend their parents’
income to purchase mobile phones. Thus there is no factor of “income” which should be a very important issue that affecting consumption behavior. And due to use parents’ money, these respondents don’t need to worry about the price of the mobile phones, also go away from our assumptions at theory part.
But taking the GDP per capita in 2008 into consideration, 3313 US dollars per capita, we cannot ignore that income and price of a mobile phone must have a significant impact on consumers’ decisions when they are purchasing phones.
Quality is the initial factor affecting consumers’ consumption behaviors on mobile phones. And the purchasing behavior is always the combination of thinking about the price, quality of the product and the income of the consumer. There is no doubt that people refusing to buy cottage mobile phones due to its bad quality and we can prove it in the graph 6 explaining why not people purchase cottage mobile phones.
And the second biggest factor is the functions of the mobile phones. I think one of the advantages of cottage mobile phones is its variety of functions. Through the survey we can say that it may help the cottage mobile phones in their 51.5 million sales in 2008.
Graph 3: Advantages of cottage mobile phones:
The survey above mainly helps to understand why people buy cottage mobile phones. From the result we can tell the biggest advantages of cottage mobile phone is the factor of price, occupy 65% in all ----cottage mobile phone is much cheaper than the branded mobile phones. Compared to developed countries, China has a huge demand for the cheap mobile phones due to a relatively low level of average
income. There are huge amount of people cannot afford such expensive branded mobile phones. And comparing a cheap low-end branded product with a cheap high level, variety functions cottage mobile phone, people will definitely willing to purchase cottage mobile phone. This well explains that income and the price play an important role in consumptions. With limited income and also want to get utility maximize, consumers have to decide which kind of mobile phone can bring them the biggest utility. I think it depends on how much income you are. If you are low income, I believe cottage mobile phones will give you more utility than branded mobile phones do when you spend same amount money on mobile phones.
The second biggest advantage is 16% people think the cost performance of cottage mobile phone is higher than the branded mobile phones. Cost performance is a overall impression towards products which combines the price and the value it worth. Cottage mobile phones have high cost performance which shows that people think cottage mobile phones are worth that price. The low price again becomes a competitive advantages in the mobile phone market affecting people’s decisions on purchasing. The more function a branded mobile phone has, the higher price it has.
When it comes to cottage mobile phones, it combines the lower price and variety of functions with delicate packing and so on. Other factors also play some effects on the sales of cottage mobile phone such as 6% delicate appearance and 7% functions and 6% variety of kinds. It can fit different people’s demand in the mobile phone market and thus consumers can get utility maximize.
Graph 4: Consumers’ attitude toward cottage mobile phone
Look at the graph above, we can get not that much people cares about the existence of cottage mobile phones. About 68% of people don’t want to judge about it. They think either it exist or not is okay and won’t affect their lives. About 17% of people think that this kind of industry shouldn’t be existed because it destroy the market environment and may lead to cutthroat competition. Surprisingly there is about 8%
of the people support the cottage mobile phone industry. Not only because they know well about cottage mobile phone, but also they think it sets model for domestic industry and has the ability to compete with international corporations. Well, there is a small amount of people about 7%, are curious about cottage mobile phone. They never used cottage mobile phones but they would like to buy some day in the future.
So they are potential consumers.
The purpose to set this question is to know people attitude on cottage mobile phones. All the Chinese people are familiar with cottage mobile phones and they know that they are more or less relate to illegal stuff. Well, there are still some people showing supportive attitude toward it. I think it shows that cottage mobile phones already have some impacts on the market and people are interested in it and want to support it. It is a good sign for the start of a enterprise. It also helps to explain that people buy cottage mobile phones because they want to support it.
While others who don’t buy because they go against it or they are curious about it and want to buy it in the future.
Graph 5: The consumers’ responds to: Do you agree that cottage mobile phone market have a bright future?
Through the survey, we can get the overall attitude towards the future of cottage mobile phone is relatively tolerant. Despite there are imperfections of low quality, no after-service and so on, people have an optimism opinion rather than criticizing about it. There are 36% of people say “Yes” when they are asked about the future of the cottage mobile phone. And there are 37% of people think it is hard to say it because the regulations are changing over time and cottage mobile phone industry may change also. Actually there is 27% of people think pessimism about the future of
cottage mobile phone. But overall the cottage mobile phone industry has a huge potential for growth.
This question is quite similar with the last one and through the attitude to the future of cottage mobile phones, it also helps me get to know the future trend of the develop of cottage mobile phone in order to make some suggestions.
What is the weakness of cottage mobile phones?
To explain this, we can see the survey result below
Graph 6:The reason consumers don’t buy cottage mobile phones:
Talking about cottage mobile phone, the first thought flash in our mind is their low quality and bad after-service. About 41% people thinking that the cottage mobile phone has low quality and 27% of the people cannot stand the bad after-service of the cottage mobile phone. I think after-service is also a part of the quality because
you won’t need the after-service department when the quality is good. Quality is the biggest problem of cottage mobile phones. As I said before, quality affects people consumption behaviors and it also brings bad reputation and lots of side effects for a company. It is generated by asymmetric information and will lead to a market failure in the end. What I want to show here is to explain how important that the quality of the product is when people are making purchase decisions.
There are 17% people are convinced that plagiarizing is the biggest problem of cottage mobile phone. Plagiarizing not only stuck the promising future of cottage mobile phones, lower its sales, but also it is always somehow illegal in China. In the theory I explained the reason why there are lots of plagiarizing phenomenon in cottage mobile phone industries and also introduce the laws for patent design in China. This survey helps to show that plagiarizing do have bad effect on the whole cottage mobile phone market finally results in the sales. Rest of the 15% people is trapped in the traditional Chinese customs that using a non-branded mobile phone are losing their faces. From this survey we can tell the main problem that cottage mobile phone industry faces now is quality and after-service. If we can focus on developing the quality of cottage mobile phone and improved the after-service condition, I think there must be much more space for the cottage mobile phones.
5. Conclusion
To draw the conclusion, through my study in cottage mobile phone industry, I find out the main factor that contributes to the production of cottage mobile phones is the profit. Cottage mobile phone producers have a huge profit, almost 50% of the total revenue are profit which drives people keep producing cottage mobile phones, makes them ignore and not be afraid of Chinese laws. Also the requirement for producing mobile phones is relatively low, thus any person can produce cottage
mobile phones without related hi-technique skills or R&D. What’s more, the system of Chinese intellectual property rights protection is not mature which also gives the cottage mobile phone producers more freedom to produce illegal products.
For the consumption of cottage mobile phones, the initial factor for purchasing cottage mobile phone is its cheap price. And the low income is an important issue of the cottage mobile phones’ consumption. Combine with income and the quality of the mobile phones, cottage mobile phone is understandable to have a certain market demand. Also the preference of the appearance, functions and the kinds play an important role in the consumption procedure. And people who think cottage mobile phone has a bright future and support cottage mobile phone industry will contribute to its sales too.
Talking about the weakness of cottage mobile phones, the biggest problem is its low quality. Due to imperfect information of the mobile phone market, cottage mobile phones’ quality cannot be assured and this also leads to another problem—after service. Cottage mobile phone companies don’t have completely system for after- service while it is a necessary part of a standard company. Plagiarizing is also a problem that cottage mobile phones have which is against the law. And after that is the so called face problem---one’s reputation. People feel shame when their friends find out his fake branded mobile phones. All of the weaknesses have been proved either by consumers or the related laws. And we can then give some suggestions to the mobile phone companies.
6. Suggestions:
To the cottage mobile phone industries
From the analysis above about the consumer and producers’ commercial behavior toward cottage mobile phones, we can draw the conclusion about the monopolistic competition mobile phone market.
First of all, low quality is always a fatal disadvantage of cottage mobile phone compared to branded mobile phones. Nowadays, even though cottage mobile phone is no longer an illegal business, which is still lack of control. Therefore, what we can do is to put forward some regulars. Government should make some regulations about this problem, such as inspecting the cottage mobile phone market and detection its quality. If it is in low quality, government should stop giving this company license for producing cottage mobile phones. I know it is really hard to fulfill, but as long as we follow the rules strictly, we can get a peaceful market environment soon.
As the plagiarizing issues, there are some laws about plagiarizing in China and I think cottage mobile phones is not a threaten to the branded mobile phones because when they are plagiarizing, branded mobile phone can surely put a charge towards them. But from my point of view, I do hope cottage mobile phone can jump out of the circle of imitating and create our own things instead of slightly changing the appearance of branded mobile phones. It is understandable for small companies to study from big companies about their technologies, designs and other stuffs, but in the long run, innovation is the only way that cottage mobile phone can have a long- term life circle and continuously getting profit. Only when cottage mobile phone companies have their own bright spot that then they can survive in the fierce market competition.
Talking about the after-service, I think cottage mobile phone industries really need to change. Since now some of cottage mobile phones have made agreements with some after-service departments and they have built a good after-service, but when they want to have a long-lasting production circle, they should have built a completely after-service system just like branded mobile phone companies.
To the branded mobile phone industries
Branded mobile phone industries should learn from cottage mobile phones, the operating system and the essential approach to lower the cost and so on. Branded mobile phone companies adopted the so-called brand value that can enhance their added value.
And in order to maintain the consistency of the brand, they must invest a lot of marketing expenses in the promotion, which in turn further increase their input. So companies purchase added value, and let consumers pay a premium for this kind of input. I think they should think more about how cottage mobile phone companies can occupy the market so much in such a short period. Learn from their experience and keep the products in a lower price. Cheaper price of branded mobile phones will promote its sell and increase consumers’ welfare at the same time.
Protect their property rights of their mobile phones. Cottage mobile phones can create a new type of mobile phone in 2-3 months, which is the result of imitating branded mobile phones. They don’t need to put lots of hard work on research and develop department. It is not fair for the branded mobile phone companies. There should not be any plagiarize in the mobile phone market. So it is better to apply design patent for all the products they design or create. Don’t give cottage mobile phone companies any chances to imitate without asking permission from branded mobile phone companies. As long as we have the proof that cottage mobile phones are imitating branded mobile phones, don’t hesitate to put forward a charge to the court.
Finally, I do hope that the Chinese mobile phone market have a good competitive environment, not only for the consumers’ welfare, but also representing a good image of the new developing China to the whole world.
Appendix
This questionnaire is set for my research and although I didn’t analyze all the result of the questions I have set, they are helpful for my understanding the whole cottage mobile phone market statues.
Questionnaires about mobile phones 1.sex *( )
A male
B female
2.What’s the brand of the phone that you are using now？ A、Nokia B、Sony- Ericsson C、Anycall D、Motto E、others * ( )
3.What’s your education level？A、high school B、under graduated C、graduated D、Others ( )
4.Your age？ *( )
A 16-25
B 26-35
C 36-45
D 46-55
E more than 55
5. What kind of characteristic of phones do your care most ?*( )
A quality
B price
C brand
D after service
E functions
F Appearances
6. How often do you change your phone？ * ( )
A less than 1 year
B 1year
C 2years
D 3years
E more than 3 years
7. What is the reason you change your phone？ *( )
A it is broken
B not easy to use
C out of fashion
D others
8. Where do you often buy your phone？ *( )
A Boutique shops
B Mobile phone outlet
C China Mobile or China Unicom
D supermarkets or shopping malls
E internet
9. Through which way you get to know mobile phone？ *( )
A TV
B newspaper and magazines
C through relatives
D promotion activities
E others
10. What’s your attitude towards cottage mobile phone？ *( )
A supportive
B against
C either is okay
D curious
11. Do you think cottage mobile phone has it market future？ *( )
A Yes
B No
C hard to tell
12. If you want to buy a cottage phone, which price is acceptable for you？
*( )
A under 1000
B 1000~1500
C 1500~2000
D more than2000
13. Have you ever tried to know something about cottage mobile phone？ *( )
A Yes
B No
14. Do you think cottage mobile phone is creative？ * ( )
A yes
B no
Cit depends
15. Do you know the place that sell cottage mobile phone ？ *( )
A yes
B no
16. Do you know cottage mobile phones have been exported to abroad？ *( )
A yes
B no
17.The reason you don’t want to buy cottage mobile phones？ * ( )
Abad quality
B no after service
C feeling shamed
D don’t know the place to buy
E they plagiarizes
18. The reason you buy the cottage mobile phones? * ( )
A very cheap
B variety of functions
C delicate appearances
D variety of kinds
E Performance-to-Price Ratio
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http://www.shanzhaiji.cn/opinion/20090504/10785.html
http://www.rucipr.com/ArticleView.aspx?id=841#
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http://www1.pconline.com.cn/mobile/zt/SZmobile/index.html
http://www.mediatek.com/en/index.php
Pan Jiutang, Analysis: Cottage industry is a virtual enterprise http://it.sohu.com/20090313/n262770581.shtml
http://bayesconsulting.com/en/yjbg3j.aspx?nid=39&cid=3
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New York Times, The Chinese cottage machine really profit margins as high as 200%
http://www.myistop.com/blogs/lqbatteryshop/
http://www.gov.cn/zfwj/index.htm
Zhou Yanling, Cottage mobile phones make up for market requirement http://tech.qianlong.com/33443/2009/04/27/71@4965431.htm
Li Yusi, India, China to block mobile phone firms to take advantage of local brands http://www.sourcejuice.com/1189390/2009/07/09/
http://www.nytimes.com/2009/04/28/technology/28cell.html
India: Say NO to Chinese cottage mobile phone
http://www.ce.cn/cysc/communications/csdt/200907/08/t20090708_19409716.sht ml
Cottage culture strong showing the rise of the global mobile phone manufacturers
http://www.sourcejuice.com/1168076/2009/04/30/Cottage-culture-strong-showing- rise-global-mobile-phone-manufacturers/ /04/30/
http://mobile.people.com.cn/GB/79431/9220156.html
The secret of cottage mobile phone
http://telecom.weaseek.com/2008/1219/52156997.shtml
