Entry Regulation into Mobile
Phone Manufacturing in China:
Why Did It End?
Zhimin Liao
Xiaofang Chen
Outline of talk
1. History of regulation
2. Technological innovation
3. The rise of bandit phones
4. Institutional change
# of
Licenses
60
Entry licenses issued each year
to mobile phone manufacturers
50
40
30
20
10
Licensing
starts
Dec
0 1998
Licensing
ends
Oct 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
# of
Licenses
60
Entry licenses issued each year
to mobile phone manufacturers
50
40
30
20
10
Licensing
starts
Dec
0 1998
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Technological innovation in 2004

MediaTek invented a “total solution” chip
into which all software are integrated

Production costs of mobile phones fell
Before: 100 engineers + 9 months
After:

3 workers
+ 1 month
Mobile phone price to consumers fell 80%
Car? Cigarette? Watch? No - bandit phones.
Illegal copies of famous brands
Large-scale failure of SOEs started in 2004
Example 1: Net profit of Bird Company Ltd.
(unit: million RMB)
300
200
100
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-100
-200
-300
-400
-500
Licensing
starts
-600
Dec 1998
-700
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
Large-scale failure of SOEs started in 2004
Example 1: Primary business income of Bird Company Ltd.
(unit: million RMB)
12000
10000
8000
6000
4000
2000
Licensing
starts
Dec
0 1998
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Large-scale failure of SOEs started in 2004
Example 2: Primary business income of Kejian Company Ltd.
(unit: million RMB)
3400
3200
3000
2800
2600
2400
2200
2000
1800
1600
1400
1200
1000
800
600
Licensing
400
starts
200
Dec
0 1998
1998 1999 2000 2001
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
2002 2003 2004 2005 2006 2007
Possible reasons for SOEs’ failure:
1.bad market situation? No.
Customers of
mobile telecom
services in China
(unit: million people)
600
500
400
300
200
100
Licensing
starts
Dec 1998
0
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Possible reasons for SOEs’ failure:
Mobile Phones
Imported
2. Competition from abroad？No.
(unit: million)
35
30
25
20
15
10
5Licensing
starts
0Dec 1998
Integrated chip
is invented
2004
Licensing
ends
Oct 2007
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Why couldn’t bandit phones be eliminated?



MTK chip lowered the cost of entry
Flood of illegal producers raised
the cost of enforcement
Regulator relied on local government enforcement,
but bandit phones

increased local employment

made constituents happy
Why didn't the network operators
reject bandit phones?
Annual revenue of China Mobile
Annual EBI TDA Pr of i t s of t he Chi na Mobi l e
（Uni t : Mi l l i on RMB）
250, 000
200, 000
150, 000
100, 000
50, 000
0
1999
2000
2001
2002
2003
2004
Data source: China Mobile’s website.
2005
2006
2007
2008
The actors
Central government
Network operators
Regulator (MII)
Local governments
Legal mobile phone producers:
SOEs
Illegal mobile phone producers:
bandit phones
Conclusion
Technological innovation
+
Conflicts of interest within government
=
Collapse of regulation