The letter underlines CEC's desire to expand its presence in the global market and consolidate its handset manufacturing resources.

The two companies announced the agreement yesterday, but the amount of the transaction was not revealed as the results of a due diligence study have yet to be confirmed.

According to the agreement, CEC, which was one of the largest electronics companies in China based on sales in 2005, will take over the remaining activities of Philips' mobile phones unit.

Philips has been contracting the production of phones to its former joint venture with CEC Shenzhen Sang Fei Consumer Communications Co Ltd, and has already exited from Sang Fei.

The electronics giant also awarded some contracts to electronics makers in Taiwan, but did not renew them this year.

The Dutch firm's mobile phone unit currently has about 240 staff, with around 180 in the Chinese mainland and Hong Kong and the rest in Europe. They will be transferred to CEC.

CEC will also have the right to use the Philips brand over the next five years.

Beijing-based CEC is one of the largest mobile phone makers in the world, turning out 12 million handsets last year, through Sang Fei and Amoi in East China's Xiamen city.

CEC, which has a wide business scope, taking in semiconductors, computers, software, mobile phones, equipment imports, and even exhibitions, has a big production capacity, but only Amoi has a strong brand in the domestic market, with Sang Fei largely remaining a contracted manufacturer.

Chen Zhaoxiong, general manger of CEC, said earlier that the company's strategy this year was to accelerate the restructuring of its industrial organizations and build its international operation capability.

The acquisition of Philips' mobile business will speed up the process, as the company is anxious to get rid of the image of only working as a contracted phone maker, and to enter global markets.

Although Philips' share of the global handset market is quite small, its unique strengths in super-long battery life and LCD screens meet the demands of some Chinese and European customers, even including IBM China Chairman Henry Chow.

Eagle Zhang, vice-president of consulting firm Analysys International, said Philips' brand is also an attractive asset for CEC in its global expansion drive.

However, he questioned the benefits of the acquisition.

"Philips' presence in the market is very small, so it will add little value to CEC," said Zhang.

"When you want to buy something, you must have a good brand of your own and you cannot only rely on others' identity."

The spin-off of the handset business is an extension of Philips' restructuring.

Christina Zhang, a spokeswoman for Philips China, said the mobile phone business needs to have an economy of scale to survive, but considering the current situation of Philips' handset business, it would be wiser to invest in businesses with high margins.

Philips' annual revenues from handset sales are around 400 million euros (US$500 million) a year.

The electronics giant sold its semiconductor business in August, and plans to focus on high margin businesses like healthcare and LCD TV sets, reducing its stakes in the costly but low-profit semiconductor and mobile phone businesses.

(China Daily 10/13/2006 page11)

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