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Starting Your Own Smartphone Company For Next To Nothing

|Includes: Apple Inc. (AAPL), QCOM, SSNLF

Start Your Own Smartphone Company

Start Your Own Smartphone Company for $1,000 By Bloomberg

Walk through a metal gate, sidestep a pile of boxes, take an elevator to a floor of serviced offices and enter the latest battleground for Samsung Electronics Co.

In a small suite in Shenzhen, southeastern China, Cathy Chang is helping clients from around the world create their own smartphone brand. Choosing from a menu of options akin to ordering a pizza, Shenzhen Zuoer Technology Co.'s customers can get into the handset business for as little as $1,000. No experience needed.

Zuoer is among the dozens of little-known Chinese companies that are tapping into a catalog of standardized components to build smartphones from $20 apiece. For a minimum order of 50 units, Zuoer assembles its own plastic outer shell with other manufacturers' LCD screens, circuit boards and batteries, helping any client anywhere take on Samsung in the $410 billion global mobile phone market in less than six weeks.

"The emergence of low-end phone vendors is chipping away at Samsung's share," said John Butler, who tracks the smartphone market for Bloomberg Intelligence. "These new entrants are quite small in comparison to a giant like Samsung, but their collective impact is weighing on Samsung's results and those of other major vendors."

Starting with Google Inc.'s free Android operating system and adding standardized chips based around technology developed by ARM Holdings Plc, companies such as Zuoer, Shenzhen Oysin Digital Technology Co. and Oteda Industrial Co. can put together phones without the legions of software and hardware engineers that Nokia Oyj, Motorola Mobility and BlackBerry Ltd. relied on a decade ago.

Easier Road

Thanks to touch-screen technology, made popular by Apple Inc.'s iPhone, they can also eschew the complicated and expensive business of designing and making physical keypads.

This simplification and standardization has opened the manufacturing floodgates, creating a multitude of Chinese rivals for Samsung, Nokia and Motorola. Among them: Xiaomi Corp., which became the world's third-largest smartphone distributor in less than five years, and OnePlus, which developed a 35-country reach in its first two years.

"It's cheaper and faster because the supply chain has become so mature and standardized," Mosetefa Zhang, head of international sales at Oysin, said over Chinese tea in a high-rise building in Shenzhen's Huaqianqbei electronics district.

Competing on Price

Down the hall from Oysin, the sales offices of yet another half-dozen assemblers are plying products so similar that price has become the main point of difference.

The path to simplicity started a decade ago when MediaTek Inc., a Taiwanese semiconductor company that dominated the DVD chip business, entered the phone-components market. Instead of selling only off-the-rack chips like larger rival Qualcomm Inc., MediaTek offered reference designs, recipes detailing what other components to buy and how to put them together. Qualcomm later followed suit.

At the same time as MediaTek was creating a a new chip business model, Google bought a little-known company called Android Inc. that was developing an operating system more flexible than other offerings.

With the two largest challenges taken care of, small teams could suddenly do the work of giant research labs, and making a mobile phone became as easy as building a Lego house.

"You don't need to do the work, we have professional designers and engineers," said Betty Zhao, sales director at UTOP Communication Technology Ltd. As many as 100,000 pieces can be made a month while the company has just two software engineers, she said.

Splintering Market

This lower barrier to entry has hurt the established names, splitting revenue across more companies, with the combined share of the top-five global mobile phone vendors falling below 50 percent in 2014 for the first time in at least five years, according to Bloomberg calculations.

For Samsung, which remains the number one maker of mobile phones, the result has been slowing sales and a slump in operating profit at its handset unit. To combat the challenge, it's revved up business in other departments, building its own smartphone processors and manufacturing those designed by Qualcomm, helping its chip-making unit post a 50 percent boost in first-quarter profit.

"With a variety of choices for consumers and our ability to quickly deliver a wide range of premium new devices and features based on consumer demand, we will actively maintain and expand our leadership," Samsung said in an e-mailed response to questions.

Commodity Business

Smartphones are now more of a commodity than their older feature-phone cousins, and average prices for the new-generation handsets have dropped 30 percent in the past five years, according Bloomberg Intelligence.

That's put the devices within reach of more of the 2 billion consumers in China, India and other emerging markets.

It's also put would-be buyers within easier reach of startups like Xiaomi and OnePlus, which have bypassed traditional sales channels such as mobile phone operators and retailers, by promoting their brands online.

That leaves owners of the fledgling brands to conduct market research, design their logos and develop marketing materials. In China, even that can be outsourced.

"We can help with marketing and promotions," said Stacy Li, a sales engineer at Oteda. "We can even help with market research to tell customers what features are popular in their market."

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