Nokia’s distributors in China boycotted the products of the Finnish phone giant in protest over heavy fines the company levied on them for selling outside their assigned territories.

On Tuesday, more than 100 wholesalers in Hunan and Shandong provinces sent a letter to Nokia, accusing the company of monopolizing prices to get windfall profits.

The letter said Nokia’s policies, such as the heavy fines, not guaranteeing the quality of products sold outside the areas and dividing sales regions are an effort to monopolize prices and the marketplace. The dealers say this may be a violation of Chinese law and added that they will sue Nokia if the world’s largest handset seller does not give them a “satisfactory response.”

On June 10, 40 dealers in the Communications Market in Ji’nan, Shandong Province, hung a red banner saying “Boycott Nokia” in front of the mall, the fifth largest cell phone wholesale and retail market in China.

Some Nokia distributors in Shanghai have also shifted to other brands, and dealers in Hangzhou, Zhejiang Province have also reportedly joined the protest, according to ChinaDaily.

In response, Nokia said in a statement that it doesn’t have business relationships with the protesting distributors and Nokia will not negotiate with them.

According to Nokia’s sales channel policy, Nokia assigns sales targets to its six global regions every six months, and the China office then assigns its target to its channels.

Nokia sold 468 million mobile handsets worldwide in 2008, with an annual growth of 7%. Of those, 7.13 million were in China, which was up 0.8% year on year.

Caibo Hu, general manager of Jiangxi Changhong Communications Equipment Co Ltd, said in May that the provincial level Nokia office in Jiangxi was assigned a 25 million yuan ($3.66 million) sales target in March, and his company shared 35 % of the amount, or 8.75 million yuan ($1.28 million).

Hu said Nokia will also assign additional sales goal amounts to pursue more business at the provincial sales-level, and the extra amount is then assigned to more of the provincial distributors.

“The distributors must meet the target no matter how much it is,” said Hu.

According to Global Times citing an unnamed salesman, he was assigned a $3 million sales target one month, while normally he can only meet 1 million and other channels shared most of those sales.

However, to manage the channels, Nokia enforces a strict regional sales policy. A distributor who declined to be named from Hunan Province said he is forbidden to sell Changsha county’s Nokia products in Xiangtan county, even if the two counties are only 40 kilometers apart.

And if a single cell phone is sold outside of a distributor’s assigned sales area, Nokia will fine him 10,000 yuan ($1,460) for each one, the distributor said.

Distributors can only receive their commissions if they meet their targets within their regions, but the problem they face is that they can only meet their quotas by selling outside their assigned sales areas, said Hu.

Facing the criticism from the sellers, Nokia said its policy is its way to manage unauthorized distribution outside a distributor’s sales area. Transferred-sold products will not receive any quality guarantees and after-sales service, said Nokia.

Zhijun Fan, an executive for electronics and appliance retail giant Suning, said transferred-sold products destabilize the pricing system, which is bad for sellers and producers alike.

But, Sun Tao, a handset and electronics distributor from Shandong Province, said that in Nokia different supply channels decide different prices, and because distributors naturally prefer the lower prices, it makes the transferred products inevitable.

Nokia has been the world’s top mobile phone maker with sales of 97.39 million units in the first quarter of 2009, giving it a market share of 36.2%, according to figures from research house Gartner.

“The Asia-Pacific market has been an extremely important region for Nokia over the years and remains hugely important to Nokia,” said Mary McDowell, executive vice president and chief development officer.

However, Nokia’s domination is being challenged by others.

GFK Group, a market research company, said Nokia’s market share in China declined to 39.9 % in February from 42.6 % a year earlier, compared to the growth of South Korea’s Sumsung, which increased from 15.4 %to 22.7 %.

This year after the May Day holiday, Nokia’s sales decreased by 70 to 80%, said an anonymous seller.

According to the first 2009 quarter fiscal report from Nokia, it predicted the total world mobile terminal sales volume would be 255 million, down 14 % year on year, and 16 % lower than that in the previous quarter. Besides, Nokia is expected to see a 19 % year-on-year decline by the end of the fiscal year.

China Electronics