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In China, Motorola gets boxed in

The cell phone maker's lead in one of its largest markets slips a few notches because of competition from local suppliers and manufacturers.

Chinese cell phone suppliers and manufacturers have eaten into Motorola's market leading share of handset sales in the country, one of the company's largest markets, Motorola Chief Operating Officer Mike Zafirovski said Tuesday.

Motorola intends to bite back by accelerating the introduction of 14 new phones meant for China, by selling cell phones in "third and fourth tier" cities and by increasing by 30 percent its Chinese research and development budget, Zafirovski said.

"We do not intend to go backwards," Zafirovski told analysts following Motorola's release of its first-quarter earnings, in which operating profit was $21 million, or 1 cent a share.

During the last three months, Motorola lost "between two and three points share" in China to local vendors, Zafirovski said, but he did not provide a more exact figure or identify which Chinese handset makers or vendors he was referring to. The drag created in China had a bigger ripple effect, the executive said, lowering by 5 percent the number of cell phones, based on the Global System for Mobile Communications standard, that Motorola shipped worldwide during the quarter.

Motorola continues to sell more cell phones in China than anyone else, but Tuesday's developments show it's facing fierce competition from all fronts, including major handset makers and a growing number of local manufacturers selling less-expensive phones. The flood of new competition comes about because China, like Africa, boasts hundreds of millions of potential new customers. Less than 10 percent of China's 1.2 billion citizens own phones, even though more cell phones are sold in China than any other country.

"The China situation... looks like it continues to be pretty challenging," Smith Barney analyst T.C. Robillard said during the conference call.

Motorola Chief Executive Chris Galvin said during the call not to discount Motorola's leading position in China. He said Motorola's brand name is the third most popular of any kind of product sold in the country.