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TechFaith: A Firm Grip On Handset Design


Like so many other young Chinese entrepreneurs, D.F. Dong could practically smell the opportunity before him. As a sales exec at Motorola Inc. () in Beijing three years ago, he saw Chinese cell-phone makers on the rise, but he found their handset designs uninspiring.

So in July, 2002, he persuaded 13 designers and engineers from Motorola to quit and set up China TechFaith Wireless Communication Technology Ltd. (), a shop that would develop ready-to-build phone designs for the legions of domestic players joining the fray. "Chinese branding was getting stronger, but the research and development was mostly imported from Korea," says Dong, now 34 and chairman of TechFaith. "I knew I could make money with an R&D company."

There's little doubt that the opportunity was there. By the end of 2002, Dong had signed up three Chinese companies and had 100 people working for him. Today, TechFaith employs 1,800 designers and hardware and software engineers, occupying four floors of an old TV factory in a grubby industrial district near Beijing's Fourth Ring Road. The company has developed more than 100 handset designs for 9 of the top 10 Chinese manufacturers as well as Japan's NEC (), Kyocera (), and Mitsubishi. While many of TechFaith's phones are bare-bones models, the company has also made handsets that play videos and MP3 songs, take photos with 3-megapixel cameras, and include the latest third-generation (3G) technology. Profits, meanwhile, are expected to jump to nearly $39 million on sales of $90 million this year, up from earnings of $18 million on revenues of $47 million in 2004, according to investment bank Kaufman Brothers.

There's just one wrinkle in Dong's happy tale. After opening at $16.25 in an initial public offering on NASDAQ in May, TechFaith's share price traded sideways for three months before tumbling to a recent $9. Investors, it seems, are concerned that China's handset market is due for a shakeout, which could trim the ranks of TechFaith's customers. Another potential worry is growing competition from the 50-plus Chinese rivals that provide handset-design services.

JOINT VENTURE

Despite the stock swoon, there are plenty of believers in the TechFaith story. Qualcomm Inc. () and Intel Corp. () own stakes in the company. And TechFaith and NEC Corp. have a joint venture that last year designed about 20 phones for China and is now developing models -- including 3G handsets -- for international markets. "TechFaith is the leading design house in China in terms of hardware development," Koji Yamasaki, an NEC senior general manager, wrote in an e-mail interview. Kaufman Brothers notes that while other independent Chinese handset designers have so far made only GSM phones (the largest global standard), TechFaith also uses Qualcomm's CDMA technology and is far ahead in 3G. Kaufman analyst Brian White says TechFaith has twice as many engineers as its nearest competitor -- paid $1,000 a month on average, about 10% of what engineers get in the U.S. And, he adds, the company's operating margins of 46% are among the best in the business. "The future for TechFaith is bright," White says.

Dong, meanwhile, says he's not concerned about flagging sales at Chinese cell-phone makers. "If they're losing money, they'll have to outsource to us," he says. But he knows he must expand beyond China to keep growing. Today 70% of Techfaith's sales are to NEC and other non-Chinese customers, although much of that work is on handsets destined for China. So the company is negotiating for design jobs from four of the world's top six mobile-phone makers and this year is opening sales offices in Japan and the U.S. If Dong can successfully break into international markets, TechFaith's future may be bright indeed.

By David Rocks in Beijing


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