Which tech devices are poised to be the hottest over the next two years? The only possible answers are, of course, smartphones and tablet computers.

At 7:30 a.m. on Dec. 16, several hundred people lined up in the morning cold in Taipei's Xinyi commercial district. A gathering of the heads of Taiwan's "big three" telecom companies, who ordinarily do not keep company with one another, had drawn the crowd through their promotion of the Taiwanese launch of the Apple iPhone 4S.

Smartphones and tablet computers have rapidly become commonplace in just a few short years.

"The next ten years will be the biggest growth period for the mobile broadband business," says Taiwan Mobile chief business officer Cliff Lai. Soon many users will have their first experience of network connectivity through "portable smart terminal devices" such as smartphones and tablet computers, Lai says.

One of the keys to this coming revolutionary wave in smart client devices will be smartphones.

Already everywhere you go you see people nearby, heads lowered and fingers lightly scribbling at their smartphone touchscreens.

"This is an intergenerational invention that changes people's lives," says Hung Yi-feng, a fifty-something vice president at Arima Communications. Even if he goes hiking out in Smangus, a village deep in the mountains of Hsinchu County, he can still send and receive emails from the mountaintops, he says.

Hung is but one example of more than 100 million smartphone users the world over. He finds his habit of constantly logging onto the Internet via his smartphone difficult to shake, checking in on Facebook wherever he goes and continually uploading photos.

"The device functions on smartphones are extraordinary, instantly replacing your alarm clock, MP3 player, digital camera and GPS; if I leave home without my phone, I'm on edge the whole day," says Lai, who has long since ditched his notebook computer in favor of just his smartphone, with which he can send or receive messages and take notes any time, anyplace.

The Institute for Information Industry's Market Intelligence Center (MIC) forecasts that shipments of smartphones, this year expected to reach 470 million units, will swell 37 percent next year to more than 630 million units.

China's Ministry of Industry and Information Technology is projecting that the number of the country's 3G mobile phone users will approach 120 million this year and break 200 million sometime next year.

"Nearly all of those 90 million new 3G clients will be switching to smartphones," MIC senior research analyst Lin Po-chi insists.

In light of these expectations, little wonder that HTC and other makers of smartphones are placing their operational focus on China next year, committing their energies to seizing a share of this most explosive of global smartphone markets.

According to forecasts from International Data Corporation, shipments of smartphones will account for half of the global mobile phone market by 2015. In other words, for every two new mobile phones sold, one will be a smartphone.

Accurately reading the huge market potential for intelligent client devices, Google's senior vice president for mobile business Andy Rubin made a special trip to Taiwan to shore up relations along the supply chain.

During an HTC-sponsored press conference, he excitedly shared news of Android's growth trajectory: In only one and a half months, the number of new users of the Android architecture had leaped from 550,000 per day to 750,000 per day, and that figure did not include users of Amazon's Kindle Fire tablet computers.

Low-cost Smartphones Hit the Market

But 2012 appears poised to unleash a price war in the smartphone market. A whole lot of smartphones will soon reach market with a low price tag of several thousand New Taiwan dollars.

A smartphone that costs nothing is no longer a pipedream. The overall scale of this market will thus be expanded, and "attracting more of those consumers who remain on the sidelines waiting for smartphone prices to drop," explained Hu Hsueh-hai, marketing director for Chunghwa Telecom's mobile telecom division, his voice rising in pitch as he eyed the crowds lining up for the iPhone 4S.

Actually, Taiwan's market is at the forefront of the world. Last year, about seven million new handset units were sold in Taiwan, half of which were smartphones. Of that number, units costing NT$10,000 and up accounted for 70 percent of sales.

The two years of 2011 and 2012 are shaping up to be a watershed in smartphone development.

"Smartphone shipments have reached a market penetration right around the 30 percent "critical mass" needed to gain quick broader acceptance," explains Arima Communications' Hung Yi-feng.

Chunghwa Telecom and other companies are taking full aim at the mid- and low-end markets for smartphones under NT$10,000. Chunghwa, for its part, will over the next year double its procurement of smartphones to ultimately account for 65 percent of overall handset procurement.

By way of explanation, the world's telecom providers now find themselves in a predicament whereby billings for voice services can no longer be counted on to drive growth in operating revenue.

Put simply, per capita voice minute rates are reaching their market saturation point. But businesses have sunk tens of billions into constructing their 3G network infrastructure and have yet to see a return. Consequently, "digital mobile broadband services will have to be improved if telecom providers are to increase revenues," as FarEastone vice president Roger Chen sees it.

Meanwhile, in China, the world's single largest telecom market, three years have passed since the introduction of 3G. In 2011, China's big three telecom providers – China Mobile, China Telecom and China Unicom – began full-on promotions of smartphones whereby "the rebates on each high-end smartphone remained too high, exceeding RMB$2,500 at the drop of a hat, so that earnings from telephone connection charges couldn't cover the rebates," MIC's Lin Po-chi reckons.

With telecom providers now under such intense pressure, handset manufacturers and their suppliers must step up, going all out to release low-cost handsets, Hung says.

"If you want to boost your 3G user numbers, putting out a no-cost or low-cost smartphone would be the quickest way, sweeping all the customers up in one go," Hung says.

"In early 2011 we proposed a low-end smartphone produced at a cost of US$100 (which telecom businesses could retail for US$120), and none of the clients could believe it," Hung laughs, adding that about a dozen orders for low- and middle-end smartphones have been confirmed. The future target is around US$60 for a smartphone.

As Hung was speaking, groups of representatives from major American and South Korean smartphone brand clients were gathered in nearby conference rooms, waiting to hear Hung's presentation on plans for future low-cost products.

Low-cost, entry-level smartphones will have an explosive development in 2012. Behind the scenes, smartphone chipmakers like Qualcomm and Mediatek, as well as suppliers of key components, are doing what they can to assist.

Qualcomm's Model 7227 chipset architecture, for example, "still cost close to US$20 a year ago – now it's just US$11. The price has been halved, yet it's packed with way more features," says Ji Bengang, president of Shenzhen Dianyi Hutong Technology. Shenzhen's several hundred handset design companies are all now scrambling to get an edge in smartphone design development.

Challenge of China's M-Shaped Market

The future smart client devices market is about to show an M-shaped market curve. High-end handsets with the snazziest features and low-end, no-frills handsets will become the leading market segments, while mid-level models will have little market appeal.

Taiwan's smartphone supply chain is already feeling the heat from Huawei and ZTE, two major Chinese competitors.

Lower prices will invariably boost global sales of smartphones, "but the question mark lies in the operations management capabilities of the contract manufacturers; one wrong move will put you in the red," Hung warns.

Looking ahead, although Taiwan has seized upon a massive commercial opportunity with tablet computers and smartphones, "if Taiwanese companies simply cling to this or that hot product, focusing on cost cutting while neglecting to boost added value, ultimately they will disappear along with their chosen hot product," says CH Tseng, Business Section general manager and partner with IBM Global Business Services (Taiwan).

Translated from the Chinese by Brian Kennedy