Chinese cell-phone firms struggle to make a profit (2)

He referred to the second-generation Xiaomi phone, a domestic gadget with a quad-core CPU priced at 1,999 yuan ($320), as having a meager 30 percent gross profit, while Apple's iPhone 5 has a profit rate as high as 400 percent.

Henry Lin, chairman of NQ Mobile Inc, a leading mobile security provider, echoed Xu's comments, saying Apple grabbed up to four-fifths of the overall profit gains despite its relatively small volume.

Domestic brands managed to dominate the low- and middle-end market that is highly cost-conscious, putting a dent in their long-term profitability, Lin said.

Xu said the problem is likely to worsen, as almost all Chinese producers use the Android operating system, which has stricter hardware requirements than iOS, the operating system that runs exclusively on iPhones.

"Therefore, local companies need to invest more in hardware upgrades to sustain a smooth user experience. That costs a considerable amount," Xu said.

Thanks to the expansion of 3G service coverage and further falls in prices of budget smartphones, the share of the handset market accounted for by smartphones is likely to reach 32 percent, or around 143 million phones this year, according to estimates from Digitimes Research, an online electronics information pool in Taipei.

A more aggressive finding suggests that smartphones and feature phones will achieve similar shipments, data from Analysys International showed.

Li Yanyan, an analyst with the consultancy, said that 77 percent of newly sold handsets in the third quarter are smartphones, adding the trend is likely to be reinforced as the "smartphone wave" penetrates across second- and third-tier cities.