Steve Jobs may not lose sleep over knock-off iPhones, but legitimate Chinese brands such as Ningbo Bird  are fretting about fakes in the cut-throat world of low-end handset makers.

China is the world's largest market for handsets, but domestic brands such as Ningbo Bird and Amoi are struggling amid intense price competition from local rivals, including some that specialize in knock-offs, having ceded their once dominant market position to foreign brands.

"A Nokia user would not be my client, but those who use Ningbo Bird handsets are very eager to try my products," said Fu Jiangang, who owns a website that sells pirated and unregistered mobile phones.

Fu is now thinking about upgrading his Hiphone, a blatant ripoff of Apple Inc's (AAPL.O: Quote, Profile, Research, Stock Buzz) popular iPhone which comes at a fraction of the original's price.

From four small assembly plants owned by a partner located in the southern boom-town of Shenzhen, Fu sells hundreds of handsets a month and is targeting farmers, migrant workers and other low-income users to expand his sales network.

"You can't expect a farmer earning 10,000 yuan a year to spend 5,000 yuan on a new phone," said Fu. "But the farmer also wants phones that look fancy, can take pictures and play music."

His products are competing against Ningbo Bird and a host of other domestic manufacturers such as Konka (000016.SZ: Quote, Profile, Research, Stock Buzz) and Lenovo (0992.HK: Quote, Profile, Research, Stock Buzz) in the bottom third of the market.

Ningbo Bird reported a loss of 34 million yuan ($4.94 million) for the first quarter, citing fierce competition in the local market, one that it once dominated just a few years ago.

Amoi (600057.SS: Quote, Profile, Research, Stock Buzz), another domestic handset maker, reported losses of 121 million yuan also in the first quarter.

Nokia now leads the Chinese market, while five foreign makers commanded almost 70 percent of the domestic mobile market, according to research firm Analysis International.

QUALITY COUNTS

In Shenzhen alone, according to official data, there are more than 600 mobile phone producers and 3,000 component providers.

Zhu Xiang, who used to run a handset plant in Shenzhen but now acts as an agent bridging overseas buyers with local producers, said the price war is "bloody".

"In 2006, I made 100 yuan from a handset," Zhu said. "In 2007, 50 yuan, and now, less than 20 yuan."

The falling barriers to entry have attracted an army of small manufacturers willing to compete on razor-thin profit margins, including factories that once produced TV remote controls and MP3 players, Fu said.

China's statistics bureau said the average price of communication devices fell almost 20 percent in May compared with a year ago, while headline consumer inflation rose 7.7 percent.

"In the last two years, we have witnessed the rise of once unknown names like K-touch and the fall of premier brands like Ningbo Bird," said Jiang Lifeng, an analyst with Beijing-based CCID consulting.

Jiang said about 170 million handsets were sold in China last year, while an estimated 70 million were pirated or unregistered.

But the rapid rise of competitors is taking its toll.

Ren Qian, a manager with Ferex Electronics, another Shenzhen mobile phone manufacturer, said many firms were already in difficulties due to rising labor and production costs.

"The profit margin is shrinking, the cost is rising, and I see many firms are dying," said Ren.

Source:Reuters