ZTE's adventurous spirit to drive growth in 2010

In 2009, Chinese manufacturer ZTE made its way to the top in typically humble fashion. It overtook Nortel and Motorola last year to become the world’s fifth-largest telecoms infrastructure vendor, and also became the sixth-largest handset vendor with over 60 million terminals shipped during the year.

Within three years, ZTE aims to be ranking among the top three in wireless competitiveness, among the top three in wireline competitiveness, and among the top five in mobile phone shipments.

To achieve such ambitious targets, ZTE is increasing its investment in overseas markets and enhancing its marketing capabilities. It will also continue to “pursue internationalisation with greater depth in a bold and venturous spirit”. One could argue that with CNY14.1 billion cash flow in hand (US$2 billion), ZTE is well positioned to foster more organic growth.

Last year ZTE did well in capturing demand in China, which generated just over half of its operating revenue in 2009. It managed to balance the prevalence of 3G handsets, datacards and smartphones in its portfolio mix, whilst maintaining its dominance in the low-end GSM and CDMA devices. In its domestic market, mobile operators have all announced a strong push behind the development of mid- to high-end devices. China Telecom, for example, invested in a 3G handset procurement program which delivered 68 models progressively from 4Q09 and 32 smartphones in supply from 1Q10. China Mobile expects to launch more than 80 TD-SCDMA handset models and nearly 180 devices this year, which includes TD OPhones and smartphones. China Unicom offered 82 customised handset models in 2009 (out of 119 licensed by the regulator), and is also increasing its range of low-cost smartphones to improve its market share.

But ZTE’s challenge now is to penetrate the handset market in Europe and North America where incumbent players are strongly positioned. To achieve its ambitious goal, the traditional ODM approach of offering discounted products at low margins is dangerous as it is not sustainable in mature markets; remember how quickly VK Mobile filed for bankruptcy in 2006, or how quickly BenQ exited the market the following year? Instead, ZTE has to focus on co-marketing and co-advertising with mobile operators, which is what helped Samsung and LG to effectively penetrate saturated markets in the space of three years. Initially, LG was working almost exclusively with Hutchison whilst Samsung was more widely offering co-marketing and co-advertising with mobile operators to increase its presence and improve brand recognition.

As a matter of fact, ZTE has already announced consolidated partnerships with Vodafone, Telefónica, and Telenor in the devices space, and has cooperated with France Telecom and Telefónica in service products. It also expects to supply handsets to all 5 mobile operators in the UK this year. Noteworthy, across its 33 European offices, ZTE also employs local people with connections to local network operators.

Furthermore, ZTE will have to specialise in a niche market, focus on operator customisation and exclusive partnerships, and continuously invest in R&D and marketing to eventually promote its own brand. This is how HTC gained ground in Europe and North America. It would not be surprising to see ZTE following a similar strategy by developing customised low-cost (but profitable) smartphones for mobile operators as well as LTE devices, which are today looking for a leader.

A final option would be to acquire distressed assets such as Palm or Motorola’s handset divisions. Such strategic moves could help ZTE bypass the large investments required to create brand awareness and secure distribution channels.