Handset-design industry in China is expected to enter a phase of consolidation in 2008 due to rapid declining profit margins, according to market sources in China and Taiwan.

Average gross margins for China-based handset design companies are expected to drift down to 3% in 2008, compared to 5% in 2007 and 15% in 2006, according to data from China-based market research firm ResearchInChina.

The increasing penetration rate of international handset vendors in the China market and a lack of production differentiation among handset design companies have worked together to squeeze business opportunities for the China-based makers, the sources indicated.

Most handset design companies in China are developing handsets using chipset solutions from MediaTek making them unable to differentiate their products from each other, said Gilbert Lee, president and COO of China-based TechFaith Wireless Technology.

A large number of handset designer in China are expected to phase out from the market due to keen price competition, the sources asserted.

Although some companies have begun developing more sophisticated products, including dual-mode, GPS-enabled and 3G models as well as smartphones, most products are still unable to reach an economic scale, the sources added.

Shipments of China-made handsets built using solutions from China handset-design companies totaled about 101 million units in 2007, and are likely to increase to 122 million units in 2008 and 142 million units in 2009, the sources quoted data from iSuppli as indicating.