Phillips has started a new programme aimed at creating a $20 mobile phone, with the intention of getting the cost under $15 by 2008.

The company is working on new hardware and software that will cost less than $5, making the overall phone cost around $20, so that the technology can be brought to what the company says is an "untapped global customer base of 3.3 billion people".

The new system, called Nexperia Cellular System Solution 5130, integrates all the electronics needed for a mobile phone and will be capable of making calls and sending text messages. It will have a monochrome screen and be able to play polyphonic ring tones.

The system should halve the cost of GSM handsets and will be based at Philip's production facility in Shanghai, China.

Today, 77 percent of the people in the world live within range of a mobile network but only 25 percent of them subscribe to a mobile service, Philips said, citing the relatively high cost of mobile phones as the main reason.

At the 3GSM World Congress in Cannes earlier this year, Motorola announced plans to produce a sub-$40 mobile phone, the Emerging Market Handset, for customers in the developing world.

The announcement came on the heels of an invitation by the GSM Association to manufacturers to tender for a project that seeks to build low-cost mobile phones. The project evolved in response to concerns by network operators in several countries that identified the cost of handsets as a major obstacle to market growth.