The rise of China's smartphone makers

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The Moto G, center, lies next to its relations, the Moto X, left, and the Moto E. Expect a boost in marketing of Moto phones since Motorola's handset division was acquired by China-based Lenovo.

Credit: Mike Homnick

10 of the top 17 smartphone manufacturers now come from China

After Apple and Samsung, which companies are selling the most smartphones around the globe?

If you guessed a growing group of Chinese smartphone manufacturers, you would be correct.

Most Americans know little about the emerging Chinese smartphone makers, let alone how to pronounce some of their names. Most of these handsets are unlikely to be seen in use by U.S. customers, at least for now.

Yet, these Chinese companies, with names like Huawei, Xiaomi, Coolpad, Lenovo, ZTE, and even Alcatel (which is now part of TCL Corp., a Chinese electronics company) are having a big impact both inside China and in emerging economies.

These companies mostly sell unlocked smartphones that run the Android mobile operating system. They usually charge much lower off-contract prices than Apple and Samsung, and they're beginning to challenge some of the world's traditional smartphone makers.

Globally, Huawei of Shenzhen, China, was the No. 3 smartphone maker in terms of revenue in the third quarter of 2014. Huawei was well behind Apple and Samsung, but in a virtual tie with LG Electronics of Seoul, South Korea, according to Infonetics Research.

2014 infonetics 3q14 smartphone vendor Infonetics

While Apple and Samsung are still the smartphone sales leaders, Chinese vendors such as Huawei and Lenovo are growing in influence.

Meanwhile, market research firm IDC reported that newcomer Xiaomi, which is based in Beijing, shipped the third-most smartphones to retailers in the third quarter. Xiaomi was just ahead of Lenovo, also based in Beijing, which was in fourth place but virtually tied with LG. Xiaomi's smartphone shipments jumped an amazing 211% year over year, reaching 17.3 million units, according to IDC.

Out of the top 17 smartphone makers globally in the third quarter, 10 were based in China, according to Strategy Analytics. Xiaomi ranked third in total production, and Huawei ranked fifth. The rest of the Chinese group in Strategy Analytics' top 17 included Lenovo, ZTE, TCL Alcatel, Lenovo (formerly Motorola under Google), Coolpad, Oppo, Vivo, Micromax and Tionee.

"The Chinese vendors are absolutely having an impact on many smartphone brands that have to compete with low-cost Chinese smartphones," said Ken Hyers, an analyst at Strategy Analytics.

"People in the U.S. don't even know who these Chinese companies are," added John Byrne, an analyst at Infonetics.

"I was just in China recently, and you see phones in use with labels I'm not even familiar with," Byrne said. "It was an eye-opener. Especially in Asia, there's a much larger variety of phones in use and not the duopoly of Samsung and Apple that we have in the U.S."

Can you say 'She-ow me'?

The third-largest smartphone maker, Xiaomi (pronounced she-ow me), was founded in 2010 by a group of tech-savvy entrepreneurs that included Jun Lei, the company's chairman and CEO, and Bin Lin, its president. Xiaomi's global division is headed by Hugo Barra, who joined in 2013 after working as president of Android product management at Google.

xiaomi m1 Krisflyer777 via Wikimedia Commons

The Xiaomi M1 smartphone.

Its first smartphone, an Android device called the Xiaomi Mi1, was announced in 2011.  Since then, the company has produced several smartphones and a tablet, the MiPad, announced in 2014.

The private company had $5.5 billion in revenues for the first six months of 2014. Xiaomi is the Mandarin Chinese word for "millet," or literally "little" (Xiao) "rice" (mi). But the name also links "Xiao" to "mi," the latter possibly short for "mobile Internet" or even "mission impossible," according to comments attributed to Jun, the CEO. He also has connected "Xiao" to a Buddhist belief that a single grain of rice is as great as a mountain.

A long-term threat?

Are these Chinese companies a threat to the established phone makers? They probably aren't a threat to Apple, which still holds a secure spot in the high end with its iPhone, but Chinese manufacturers do pose a threat to many other well-known smartphone makers, even powerhouse Samsung.

Some Chinese-made smartphones are sold at $100 to $200 without a carrier contract (compared to more than $600 for an iPhone 6), which puts several traditional manufacturers on guard.

"You'll never find Apple in the $100 off-contract range, but Samsung has tried some entry-level phones while Chinese vendors have included top-end specs and still reduced their prices to gain market share," said Ramon Llamas, an IDC analyst. "That move has pushed Samsung back on their heels."

Llamas said low-priced Chinese-made smartphones do indeed represent a threat to some manufacturers. "It's just a question of how long Chinese manufacturers can seek volume sales over profit," he said. "It's harder to compete on the lower end. Knowing how costly it is to manufacture a smartphone, I wouldn't be surprised if some vendors are losing their shirts."

Even in the U.S., Samsung is less able to sell a midpriced smartphone off-contract, Hyers said. For example, he pointed out that the Samsung Galaxy S5 Mini would cost around $250 without a contract and said consumers would be more likely to choose a low-priced Chinese device that can cost $150 and has the basic features that many buyers want. In the U.S., customers are skipping midpriced phones and buying either premium smartphones, like the iPhone 6 or the LG G3, or low-cost, entry-level or near-entry-level devices, like the Moto G or the Lumia 500.

"Midtier devices are not selling well at all in the U.S.," Hyers said. "Market dynamics really favor higher quality and very competitively priced smartphones from Chinese vendors."

"ZTE is really gaining U.S. market share along with TCL Alcatel," he added, noting that TCL Alcatel offers French design sense along with low-cost Chinese manufacturing.

China's advantages

Chinese smartphone manufacturers have an advantage over other phone makers in the global market in part because low-cost labor keeps their manufacturing costs down. But the cost of labor isn't the only factor.

For smartphone sales within their home country, Chinese manufacturers don't pay the patent and intellectual property royalties they would pay for sales in other countries because of lax government IP regulation, analysts said. Every handset made typically comes with scores of different IP royalties that are paid to various companies for network, hardware and software functionality, and those fees can add $20 to $40 to the cost of a device on top of the cost of parts and assembly, Hyers said. Stripping out most of that cost can help keep smartphone prices down in China's enormous market. And that, in turn, enables those vendors produce phones in higher volumes at lower costs.

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