Motorola’s Hot China Deals Cool on Slowdown?

Is the China IT manufacturing market still warm or heading for a cooling-off period? As any good accountant will tell you, that depends.

On one end of the spectrum are reports that the Schaumberg, IL-based Motorola  won a $1.6 billion order to supply mobile phones to distributor China Telling Communications. However, balancing out that good news was a warning from a financial analyst pointing to a possible downturn.

Motorola spokesperson Juli Burda refused to confirm the reports as more than “a first step in a relationship” between the phone maker and the China-based phone distributor. However, the move could help Motorola better compete with rival Nokia, , which already sells CDMA-version and 3G phones in one of the world’s largest markets. Burda said Motorola has sold phones in China “for years.”

As reported in 2004, Motorola has been in China since 1987. In 2003, Motorola rang up more than $1 billion in contracts from China carriers. Motorola helped China Unicom expand its CDMA network while providing China Mobile the gear to improve its GSM infrastructure, as well as prepare for 3G.

After speaking with Motorola and more than a dozen other OEMs, such as Nokia and LG Electronics, Merrill Lynch analyst Steve Fox recently returned from a tour of China with a warning.

“We are in the midst of a ‘mini slowdown’,” he wrote in a report issued today. Driving the slowdown, possibly lasting two financial quarters, were unusually high inventories and lowered expectations.

The report found while inventories of North American companies increased over the past year, sales remained flat. International OEMs, on the other hand, saw their inventories fall.

“We think the outlook between now and mid-2007 to be tepid at best,” wrote analyst Steve Fox. Besides production of Apple’s iPod and local LCD TV demand, Fox was unable to point to anything creating a greater need for components or services.

Despite benefits from being in China and becoming accustom to new products, such as the iPod, driving demand, “there was limited talk of OEMs adding to existing orders ahead of Christmas at a time when production trends appeared on pare with the seasonal peak in production,” Fox wrote.

Among signs of a China downturn:

  • Printed circuit board inventories rose faster than sales for three consecutive quarters.
  • Taiwan device manufacturer’s inventory highest in three years.
  • North American electronic component sales flat since Q4 of 2005, yet inventories up 20 percent.
  • International OEM inventory declined over the last year.

    While the financial outlook was little troubled by demand from industrial and enterprise demands, higher volume consumer items, such as handsets and PCs, “bear additional watching.”

    Today’s news from Motorola comes just a day after the phone maker announced plans to purchase Good Technology, the privately-held company that competes with rival Research in Motion (RIM).

    Earlier this year, RIM called China “a large and important market” and began offer international business people BlackBerry e-mail service through China Mobile.

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