The world’s biggest and best-known sellers of mobile telephones face cutthroat competition in China. The market share of local vendors, such as TCL and Ningbo Bird, has jumped from 5 percent of all units in 1999 to nearly 40 percent in 2003, with upward of 50 percent growth in 2003 alone (exhibit). These gains have come largely at the expense of multinational corporations. To slow the penetration of local players, a McKinsey study suggests, global branded handset makers should consider outsourcing the design of some products to original-design manufacturers (ODMs) in Taiwan and South Korea. In this way, foreign manufacturers could cut their costs, increase their revenues, and more quickly market the models that Chinese consumers really want.

In addition to designing products for other companies, ODMs frequently manufacture goods for customers that then affix their own brand names. This one-stop offering distinguishes such ODMs from electronics-manufacturing service companies such as Solectron and Flextronics, which either don’t undertake design or have only started to build these capabilities. Global mobile-phone makers currently avail themselves of both kinds of outsourcers to varying degrees. While the use of ODMs may be relatively new for the mobile-handset industry, these companies currently manufacture more...