A Bearish Call on China Techfaith Wireless (CNTF)

| About: China TechFaith (CNTF)

A China Stock Blog reader left the following comment this morning on mobile handset designer China Techfaith Wireless (ticker: CNTF):

As my last posts suggested, CNTF's design has failed many of her clients. I conducted extensive research on the issue recently and resort to the help from some marketing research firms in China. Again, I have to acknowledge my mistake of recommending the stock early on.

Today, a well-circulated report confirmed my opinion. You can reach it on many web sources. For an example, http://business.sohu.com/20051215/n240976892.shtml

The report was originally from International Finance. The title says 'Japanese cell-phone makers are strategically pulling out of China'. According to the report, NEC just gave up all of its low-end and mid-level models in China, which accounted for 40% of its sales in China. It will focus on models of RMB2000 or more. It will cut back from 30 models in 2004 to 15 models in 2006. And, it will close around 500 retail points in China to cut back loss. Globally, NEC is not doing well either. NEC expects to sell 10 million handsets worldwide in 2005, 5 million less than originally expected, while incurring a loss of 25 billion Yen.

On Dec 9th, 2005, Panasonic announced the closing of its manufacturing base in Philippine and Czech and its research center in the US and UK, thus formally getting out of the overseas 2.5G market including China.

In March 2005, Toshiba pulled out of China by dissolving its joint venture with Putian.

Kyocera and Mitsubishi suffer with very weak performance in China. Mitsubishi has been repeatedly questioned by outsiders about if it will pull out of China. The company's rep in China denied it but the market seldom sees new models from it in China.

All the information above is excerpt from the report. I can not assure you of the accuracy of the specific numbers given but I can assure you the whole picture for the Japanese cell-phone makers in China is exactly what it depicts.

My explanation to it is that Japanese are holding back its most advanced technology from China. Like what Toyota and Honda do, they keep the best tech domestically. Worse than Toyota and Honda who sell outdated models in China (but they are advanced enough to beat the American and German auto models in China), Japanese cell-phone makers even do not care to sell their old models in China. They resort to local R&D. That showed the sleekness of Japanese. They found CNTF is a good way to peek into the strength of Motorola's R&D strength. NEC, Kyocera and Mitsubishi all used CNTF for model design and used Wuhan NEC for manufacturing. As what I understand about Japanese, what they get from doing business is not making profit. That is too American and generic. For them, it is about beating you down and feeling proud of their superiority. So, from the very beginning, partnering with CNTF in China is just a strategic move for NEC to look into Moto's R&D strength. I think they have got their wish. The foreigners including both Americans and Chinese suck. Just look at the performance of the products designed by the Chinese who learned the tricks from Americans. They brought Japanese nothing but loss.

But, I have the same opinion with the author of the report: for 3G products, Japanese might have a comeback in China since they have accumulated some respectable strength there. But, for that matter, they have to show off their real own strength rather than playing with R&D outsourcing if they really want to kick the butt of our inferior. After all, the Japanese brand names in the Chinese cell-phone market have been destroyed, sorry, in the name of Japanese. Thanks to the efforts by the Americans (Motorola), Koreans (Samsung and LG) and Europeans (Nokia), Japanese just can not resort to the Chinese to design third-tier junks to compete with them in China.

I just have a clear memory on Toyota's shipment of its engineer team from Japan to the US for a local design improvement after countless complaint by the Americans then promptly pulling them back to Japan after the job was done. In my opinion, these superior have a firm determination on learning the best from everybody else but won’t share a dime on what they are best at. They will kill all of us in the future. I am not kidding. It is not a secret that Japanese automakers always sell the best breed in Japan, the second-tier in Europe and the US and throw the junk to China and Africa. But, very sad, they still beat most of us.

BTW, I suggest Chinastockblog adopts a disclosure policy like Motley Fool. Starting from Ezra, at what price and how many ADRs did you buy on CNTF? kidding...

Finally, I have finished my stinking job here with CNTF. Suggest selling it now. Voluntary Disclosure: had a position with an average cost in single digit, sold out after all the hypes.

As a Chinese who does have a naïve heart to go for Chinese tech leadership, sorry for the nationalism, wait for the Huawei’s debut on NYSE. That is the only one that deserves Chinese’s respect, even Cisco’s. Suggestion: do not hold its share after its founder Mr. Ren steps down. He is the soul of the firm like Warren Buffet to Berkshire.

Comment: You can access all China Stock Blog articles on CNTF here.

Final Comment: Seeking Alpha has a strict disclosure policy. When we have positions in a stock mentioned in an article we disclose it. I have never held a position in CNTF -- though I wish I had taken the advice of many China Stock Blog readers who called the bottom (around $8.00) of the latest rally.

CNTF chart.