Shanghai Cos Software Company, Ltd Case Study

SCOS Background & Problem

Situational Summary: Shanghai COS

Shanghai COS Software Company, Ltd. (SCOS) is a relatively new entrant to the subscriber identification module (SIM) card market. As a young and growing company in a high technology market, it must choose how to most effectively concentrate its resources within a market that is both highly competitive and expanding at a phenomenal rate within China (the primary marketplace of SCOS). Shanghai COS is able to compete within this market because it believes that it has superior research and development capabilities, having already been able to design an entire product line of SIM cards from the low to high end within one year (with an average development and design time of about three months work for each SIM card). Currently SCOS functions within both the high and low end of the market with the differences in the products in each market primarily reflecting the memory structure and functionality of the cards in terms of capabilities such as internet and email access.

The first projects undertaken by Shanghai COS reflect its ability to cater various parts of the market, and has so far included primarily low end chips, with final product qualification underway for more advanced components.

The Chinese SIM Card Market

The SIM card market within China is predicted to grow at a rapid rate, reaching upwards of 100 million subscribers with an annual revenue stream of $200 million dollars. Currently there are 12 SIM card providers within China competing within this marketplace. SIM card developers in China follow a model of “upstream” and “downstream” players, with research and development partners such as Shanghai COS handling the design and technological components of the SIM card as part of the upstream component and downstream manufacturers producing the SIM cards based on the upstream designs.

Currently, the SIM card market is expanding not only numerically due to China’s increased economic development, but also substantially in the technological level, with GSM, CDMA, 2 and 3G technological developments on the horizon, requiring more complicated SIM cards in the future.

There are two primary customers within this market, China Mobile and China Unicom. China Mobile tends to collect orders on a quarterly basis with local branches selecting card vendors that suit their preferences. China Unicom on the other hand, orders cards as needed, with the central office selecting the vendor and type of card needed for the entire company.

The Problem at Hand

Currently, the Chinese SIM card market is subject both to increasing demand based on rapid development of Chinese infrastructure and economy, and competition based primarily on a few local providers and several foreign providers (see below for a breakdown of the competitors within the market). SCOS now enters this marketplace as a relatively new player, and it must now face decisions regarding its position in the marketplace, and how current actions it undertakes regarding orders and segmentation of the marketplace will affect its future ability to compete within the marketplace.

SCOS must now effectively target the SIM card market of its choice. In absolute terms this means should SCOS position itself as a high or low end card maker, or some combination of the two. In order to do this, they must properly forecast and understand their target segment, and determine what kind of functionality they should concentrate on. This is important as research and development times, though relatively quick for SCOS, force the company into specific parts of the market for periods of time before it can produce different products for different segments.

To this end, SCOS must decide wither the demand for high end cards is sustainable within its current approach to the market, and whether they can compete effectively against low end card makers already abundant within the Chinese marketplace. SCOS being a relatively new entrant to the market, they may be required to focus their efforts in order to achieve adequate economies of scale.

Currently SCOS has had early success within the market, and is developing relationships with the two Chinese cellular providers. However at this time the company must also decide whether to take what is available to it at the time—two relatively small volume orders for low end SIM cards that may satisfy investors with additional cash flow, though with relatively low margins or whether to concentrate on developing itself into a higher end SIM provider and perhaps position itself for future growth as the Chinese SIM card industry and cellular network demands evolve over time.

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