What has transpired in the mobile telephone market is an ominous sign for Chinese policymakers, as it shows how foreign companies can exploit the new access afforded them under World Trade Organisation rules to out-compete local firms with superior technology, design, finance and advertising. The fear is that the same thing will happen in other fast-growing sectors poised to open to foreign competition in line with China's WTO commitments.

Beijing had expected the mobile industry to go the way of colour televisions, refrigerators and washing machines, where domestic producers used lower prices and thick-on-the-ground sales and marketing networks to outmanoeuvre foreign brands.

True to pattern, Chinese mobile-phone makers raced ahead in 2001, 2002 and 2003, when total production grew by an annual 51.9 per cent, 35.8 per cent and 18.1 per cent, respectively. Their market share rose rapidly, exceeding 50 per cent for the first time in 2003. Chinese conglomerates such as TCL, Konka, Haier, Lenovo and Skyworth rushed into the sector, betting that it would be the next big revenue source to offset plateauing sales in other product lines.

But last year, the foreign brands turned the tables, adjusting their global strategies to include China and using the same weapons as their domestic rivals - large-scale, low-cost production, heavy investment in local research and development, national distribution networks and heavy advertising.

Global handset leader Nokia, for example, changed its mainland strategy from the second half of 2003, turning the country into one of its five biggest markets. It now employs more than 4,500 people at four Chinese production hubs, five R&D centres and dozens of offices across the country.

Nokia and other foreign players reorganised their sales and marketing systems to mimic their domestic competitors, using locally run sales operations, an array of new models and ultra-low pricing.

It quickly became apparent that Chinese consumers are not 'patriotic' and buy based on price, function and appearance. China has become a part of the global market, in which domestic firms are gradually ceding home-court advantages.

In 2003, Nokia sold products worth Euro2 billion ($20.27 billion) in China and exported Euro1.7 billion from its mainland factories, the largest exporter of any foreign firm in the mobile industry and an example of the country's importance as both a market and a production base. By the end of 2003, its investment in China had reached Euro1.7 billion, giving it strong lobbying power in Beijing.

China is now the world's biggest manufacturer and exporter of mobile handsets, accounting for more than one third of global production. Last year, it produced 230 million units, of which it exported 140 million, up from 186 million in output and 95.23 million in exports in 2003.

Most of this production is by foreign manufacturers such as Nokia, Motorola and Samsung. Ningbo Bird, the biggest domestic producer, had exports last year of only three million handsets.

Aggregate domestic sales last year were 63 million sets, of which about 20 per cent were replacements for existing models. According to industry estimates, Nokia ranked first with sales of 11.53 million, followed by Motorola with 9.94 million.

'We are very far from being a top international brand,' said Xu Lihua, chairman of Ningbo Bird. 'We do not have advanced technology. The domestic industry is very backward. The outer cases for our models selling for more than 1,000 yuan are made in South Korea.'

Ningbo Bird is a big player in China, with output last year of 15 million units, ranking it in the top five in the domestic market, with Nokia, Motorola, Samsung and TCL. But it ranks only eighth in the world, according to a study by research agency IC Insights, with 2 per cent of the global market, a fraction of that of the top three - Nokia with global sales last year of 205 million, followed by Motorola with 99 million and Samsung with 89 million.

Ningbo Bird is little known in the world because it only uses the brand in exports to developing countries. Elsewhere, it supplies sets to Vodafone, Orange and other global companies.

Like other domestic makers, it lacks the capital, technology and expertise to set up its own factories and R&D centres abroad.

Domestic media reports have said Ningbo Bird is interested in acquiring the mobile-phone business of Siemens, with which it has a co-operation agreement, but neither company has confirmed that.

Last year saw sales fall at several domestic producers, such as Amoi Electronics, Shouxin and Kejian, the Shenzhen firm whose brand adorned the shirts of the Everton football team in England in 2002 and 2003. In December, Shanghai Panda Yimei said it was pulling out of the market completely.