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PUBLISHED : Tuesday, 18 September, 2012, 10:17am
UPDATED : Tuesday, 18 September, 2012, 10:29am

ZTE on long smartphone march

ZTE's focus on smartphones, including a decision to develop its own OS, is a smart strategic move but is likely to fail due to inexperience and stiff competition.

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

Telecoms equipment maker ZTE (0763.HK; Shenzhen: 000063) is hoping to avoid the fate of faded cellphone giants Nokia (Helsinki: NOK1V) and Motorola by focusing on smartphones as it hones an expansion strategy that it hopes will revive its stagnating fortunes. That seems to be the latest message from the embattled company, whose profits have plunged in recent quarters as its core telecoms equipment business weakens and it pumps major new investment its cellphone unit. Personally speaking, I do think the emphasis on smartphones is a smart one as these computer-like phones are clearly the wave of the future and will probably outsell older phones within the next five or six years.

But ZTE's late arrival to the smartphone game means it is already at a distinct advantage to heavyweights like Apple (Nasdaq: AAPL), Samsung (Seoul: 005930) and HTC (Taipei: 2498). Its decision to focus on lower-end models that often carry the names of its telco partners also means it may have to struggle for brand recognition, even as it competes with a growing number of Chinese rivals like Huawei and TCL (HKEx: 2618) eying similar smartphone strategies.

Let's look at the latest news, which comes from ZTE's cellphone chief He Shiyou who said at a Beijing event that the company's total cellphone unit sales will remain approximately flat this year from 2011. But even though total unit sales will be flat, the company still expects revenue from cellphone sales to rise 30-35 per cent this year due to strong growth from smartphones that typically carry higher price tags than older traditional phones.

The company said it expects to sell 30-35 million smartphones this year, which would represent about a doubling of last year's sales of 15 million units. The strong growth in smartphones comes as ZTE focuses less on cheaper, lower-end phones that were previously responsible for its rapid rise to become one of the world's five top cellphone makers. Many blame a failure to embrace smartphones for the rapid downfalls of Motorola and especially Nokia, which used to be the world's top two cellphone makers but have seen their fortunes plunge in the last two to three years.

In an interesting twist to its smartphone strategy, ZTE's He also said his company will develop its own smartphone operating system (OS), which would theoretically rival more popular systems developed by Apple, Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). I said just yesterday that Chinese companies need to develop their own smartphone operating systems to avoid becoming too dependent on overseas products, especially Google's popular Android OS. But that said, I have some serious doubts about ZTE's ability to develop such a system, since it has little or no history as a developer of consumer-focused software.

Instead, I would worry that this new OS will cost ZTE not only lots of money to develop, but will also distract it from its bigger mission of building up its smartphone business with sales of more proven software from companies like Google and Microsoft. I'll conclude by saying that I applaud ZTE for its smartphone push, which represents a smart move strategically. But due to all the obstacles it faces, I would only give this initiative a 20-30 per cent chance of success, and instead worry that ZTE will end up hurting both the company's profits and longer-term prospects over the next two or three years with a smartphone drive that is likely to fail.

Bottom line: ZTE's focus on smartphones, including a decision to develop its own OS, is a smart strategic move but is likely to fail due to inexperience and stiff competition.

To read more commentaries from Doug Young, click on youngchinabiz.com

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