Hidden in a non-descript commercial high-rise in Beijing's Haiding District is an office devoid of glitzy decoration, where even the reception desk displays nothing but a small company name plate. Given the decidedly modest surroundings, few would imagine that this is the home of Beijing Tianyu Communication Equipment Company, China's largest homegrown cell phone maker, selling 24 million handsets per year, and racking up US$1.2 billion in sales.

Tianyu's K-Touch mobile phones are now the No. 3 brand in China, behind international heavyweights Nokia and Samsung, with a market share of 10 percent. This year Tianyu handsets enjoyed a sales volume 11 times greater than those of Chunghwa Telecom, Taiwan's largest mobile and fixed-network operator.

Last year Taiwanese tycoon Terry Gou, chairman of Hon Hai Precision Industry, the world's largest contract electronics manufacturer, made a special trip to Beijing to court this important Chinese customer.

In May this year Warburg Pincus, a US-based private equity fund, invested 530 million renminbi for a 10-percent stake in Tianyu, citing bright prospects for the company in the Chinese market.

Snatching Away Nokia's Low-End Market

Since Tianyu released its first own brand phone two and a half years ago, it has become China's largest mobile phone manufacturer. Among trend-conscious fun-loving students, Tianyu has even seized a 27-percent market share, and its cool, sleek K-Touch handsets have become the second most popular choice of young people, right behind Nokia.

"The K-Touch phones have gobbled up Nokia's low-end market,"observes Li Zhe, manager at the Zoomflight outlet in Beijing's Zhongguancun South Road. Li is selling almost 30 K-Touch handset at his shop alone per day.

Founded only in 2002, Tianyu emerged from the handset distributor Beijing Benephon established by Tianyu CEO Rong Xiuli. Beijing Benephon is the exclusive agent for Samsung, North Telecom, and Dopod mobile phones in Beijing and Shanghai.

Earning an MBA from the China Europe International Business School in Shanghai, Rong took out a loan of 1.6 million renminbi to found her own business before the age 40. Banking on her youthful vigor, Rong made her first bucket of money by growing Benephon into China's top distributor of communications equipment within just three years.

After managing a handset distributorship for many years, Rong was aware that her company would only have a bright future if it made its way into the upstream handset industry chain. Small in stature but big in resolve, Rong invested the tens of millions that her company had made over the preceding few years to get into the unfamiliar handset manufacturing industry.

"A handset distributor sells other people's products. But the marketing model and the prices are decided by the big foreign players such as Samsung and the like. The agents don't have a say at all, so selling is not much fun,"Rong said in a recent interview with China's major television broadcaster CCTV with the frankness typical of people from Henan Province.

Today China's handset queen is a millionaire, but she keep a low profile and avoids flaunting her wealth. She does not have a driver and still drives a modest Volkswagen car worth 200,000 renminbi. Her office does not even have 20 square meters of floor space and is unadorned by any interior decoration. Reports and datasheets are piled up on the floor, and a small bed has been placed in a corner where Rong can rest during her usually long workday.

An Initial R&D Loss of Rmb 80 Million

Many people think Rong has a nose for selling mobile phones, but few were aware that just after founding Tianyu she struggled feverishly to establish an R&D team, pouring huge sums into the development of proprietary handset technology.

Despite its efforts Tianyu was unable to release its products on time. Stuck with warehouses full of mobile phone components, the company burned through 80 million renminbi on R&D in a year, incurring irrecoverable losses.

"At the time developing the very first handset was very hard. Who would have expected it to take us more than eight months to come up with a prototype?"recalls Xu Li, head of Tianyu's R&D department, who joined the company in 2003.

The situation improved when Taiwan's top chipset design house Mediatek dispatched an expert team in 2005 to provide Tianyu with technical support. Finally, in January 2006 the first K-Touch brand cell phone hit the market.

Swamping the Market with New Phones

Last year Tianyu's sales grew at a breathtaking pace. Thanks to full-fledged support from Mediatek, Tianyu's monthly handset sales topped the 1 million mark, boosting the company to become China's largest homegrown handset maker.

Tianyu adopted a strategy of swamping the market with a never-ending array of new handset models. Last year it developed more than 100 new models, which means that on the average a new mobile phone hit the market every three days.

Presently, Tianyu has more than 600 employees working in R&D with more than half of them focusing on software development. After gaining a considerable amount of R&D experience over time, the Tianyu R&D team was able to greatly shorten the product development cycle. On the average it now takes only three months to develop a new model, about one third of what it takes the major manufacturers in Europe and the United States.

Tianyu defines its position as a system integrator for mobile telephony. It sources its IT components directly from the best software and hardware suppliers in Taiwan, China and the world.

"Only if you stand on the shoulder of a giant can you see farther,"says Xu in explaining the Tianyu business philosophy.

Mobile phones made in China have long had to battle an image of bad quality. Rong, who daily meets with distributors, has very strict requirements when it comes to product quality inspection standards, as she always compares her company to handset industry leader Nokia.

"In the very beginning all suppliers felt that Tianyu has gone crazy. After all, they are selling phones that cost just a few hundred renminbi! So what's the point of being so strict?" a vice president with Tianyu contract manufacturer BYD asks wryly.

In the industry Tianyu is notorious for being a difficult customer, reveals the BYD executive, who did not want to be named. But as a result of strict quality control, the return and repair rate for K-Touch handset has been contained within the single-digit range.

Arresting Innovations

Yet now that Tianyu has successfully increased its market share thanks to its myriad new handset models,"it can no longer rely on quantity to squeeze out rivals,"says Xiao Chaojun, vice general manager at Tianyu. Instead, he argues, Tianyu needs to increase the value of product innovation.

This year, Tianyu changed its marketing strategy. Instead of going for an extensive selection of models, the handset maker now emphasizes innovative mobile phone applications. While the number of model releases has been halved, innovative features are supposed to double. At the beginning of this year, Tianyu settled on the marketing slogan"‘In' like K-Touch"(the English word"in"combined with the Chinese word xiang, meaning"like,"is a pun on the Chinese word for"image”). Its aim is to promote its new series of high-resolution cameraphones. In the first quarter of 2009, a high-end business smartphone will be released.

In May the K-Touch C800, the world's first 8-megapixel cameraphone with optical zoom, went on sale, becoming the first China-made cell phone priced above 2,000 renminbi, which previously had been seen as the"glass ceiling"for local handset brands.

Interestingly, the high-end C800 cameraphone is the most classic example of a"Taiwan Inside"product, since all its components are made by Taiwanese companies. Mediatek makes the C800's chipset, digital camera makers Altek and Premier provide the optical zoom, and Hon Hai supplies the LCD display, while Foxconn, BYD and Hangzhou Eastcom Cellular Phone are in charge of handset assembly.

The hidden rule of China's computer, communications and consumer electronics industry is not to pursue ultimate product perfection, but the best price-to-performance ratio.

"China's mobile phone industry is like a fashion industry. Each season you need to come up with new themes and changes if you want to satisfy the Chinese customers' thirst for new gadgets,"says Xu in analyzing Chinese tastes and preferences. Not even half a year after the world's first 8-megapixel cameraphone came out, Tianyu is already planning to release another one with an even higher resolution of 10 megapixels so that photographs can be blown up or printed to A3 size, which will create another wave of new market demand.

Mobile phones with built-in television tuners are also a new product line that Tianyu hopes to develop into its next hotseller. At the Tianyu R&D laboratory on the 22nd floor, a group of engineers is busy testing the signals of various TV channels on a novel mobile phone that is a formidable all-round talent. It integrates a 10-megapixel camera, a PDA, satellite navigation, electronic book ("eBook”) functions, as well as radio and TV tuners.

For the hundreds of millions of migrant workers in China, the mobile phone is an essential gadget. When they return home to their bare, inhospitable dormitories after a hard day's work at the factory, they have little else for entertainment. This is another reason why TV mobile phones are so popular in China.

China launched digital TV during the Beijing Olympics this summer. Dozens of handset makers seized this opportunity to launch TV cell phones – more than 100 models are presently available. However,"only Tianyu handsets are able to pass tests by China's State Administration of Radio, Film and Television and telecommunications providers,"notes Stanley Wang, VP for Engineering and chief technology officer at Innofidei, a system solutions provider for mobile TV broadcasting. After all, Tianyu was the first cell phone maker to come out with a TV mobile phone.

Tianyu has also begun to look beyond its huge home market, targeting consumers overseas. For the past year the company has zeroed in on the emerging markets of India, Southeast Asia and the Middle East. To date, it is selling more than 20 percent of its handset production overseas.

Translated from the Chinese by Susanne Ganz

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Chinese Version: 天宇朗通 山寨王變正規軍