By Charlotte Windle
BBC Shanghai business reporter
University student, Ma Dingming, has just purchased his second mobile phone this year.
University student Ma Dingming spends a fortune on upgrading
The phone, made by Taiwanese company Dopod, cost him $848. The phone he bought earlier in the year cost him $867.
"I've bought the new phone because it's the latest model," he says.
"It is really more of a PDA so it has a high CPU frequency and larger RAM than your average phone and a Microsoft operating system that enables me to take notes, surf the internet and log onto MSN chat rooms."
Ma financed the purchase of the two phones with his monthly allowance, as well as with money received from relatives last Chinese New Year, when it is common to give children and young people "hong bao" - envelopes filled with cash - as part of the festivities.
Flexible sales methods
China's increasingly wealthy middle classes and tech savvy youngsters are the main reasons why companies, including Nokia and Motorola, have invested billions of dollars in establishing manufacturing and distribution networks across the Chinese mainland.
In 2004, the Chinese purchased 92 million mobile phones, an increase of 15.8% over 2003, making China the largest mobile phone market in the world.
The International Data Corporation forecasts that the market for mobile handsets will continue to grow, with more than 400 million handsets sold between now and 2009.
In the first half of 2005, the top five brands on the mainland were Nokia, Motorola and Samsung, followed by local companies Ningbo Bird, TCL, Konka, and Lenovo.
But, perhaps surprisingly, the market share held by China's domestic producers is falling, down from 34% at the beginning of the year to 30% at the end of the third quarter.
Furthermore, Lenovo's mobile phone division is the only domestic handset maker is profitable so far this year.
"The main reason for the success of foreign companies is their success in developing more flexible ways of selling their handsets," according to Alan Hsieh, managing director of International Data Corporation China.
Third generation mobiles
Domestic brands insist on selling through their own distribution channels.
Foreign phone makers are gaining market share
They have their own branches in every province in China, where they employ thousands of salespeople who then sell to retailers.
Nokia and Motorola, on the other hand, use individual agents who then sell to retailers.
This agent system cuts costs and enables them to reach more effectively into smaller cities in more remote areas.
The government has not interfered with this shift in favour of foreign handset makers.
It is, however, keen to push China's home-grown intellectual property in the field of mobile communications, in particular its home-grown 3G, or third generation mobile standard known as TD-SCDMA.
The standard is still being tested, which is why China has been slow to divide up its 3G licenses.
The Chinese government must decide whether to push ahead with TD-SCDMA which is not commercially proven but whose developers claim will use only a fifth of the bandwidth of the next best alternative, the European standard WCDMA.
It seems unlikely that China will opt for the American standard, known as CDMA 2000, given that its developer, Qualcomm, levies a hefty charge for its use.
Whatever China decides, it will have to make the decision soon.
"The government will act no later than the second quarter of 2006," says Steven Qin, business planning director for Shanghai-based Panasonic partner Cosmobic Technology.
"After all, the network needs to be fully operational in time for the 2008 Olympic Games."
The most likely outcome is that the European standard, W-CDMA, will be adopted by the state-owned China mobile, which operates 70% of China's mobile phones.
However, it seems likely that at least one of China Mobile's 4 competitors will be forced to adopt China's home-grown standard TD-SCDMA.
If the standard proves successful, China hopes to export TD-SCDMA to other developing markets.