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Can China's phone makers take on Apple and Samsung?

Huawei and ZTE have their sights set on a bigger presence in the US and European markets

By Martyn Williams
February 21, 2013 08:08 AM ET

IDG News Service - They are probably the biggest cellphone makers most people have never heard of. Despite ranking third and fourth in the global smartphone market in the fourth quarter, mention Huawei and ZTE to many Americans or Europeans and you're likely to be met with a blank stare.

But perhaps not for long.

Both companies have had considerable success selling phones in developing countries and now hope to replicate that in the more advanced U.S. and European markets. If they get their way, their phones will soon be competing directly with those from the likes of Samsung, Apple and HTC.

For consumers, their arrival could mean greater price competition and a wider selection of smartphones, but their success is far from guaranteed. Building a recognizable brand in the highly competitive U.S. and European markets is no trivial undertaking.

"It is a big uphill battle for them to move into the U.S.," said Chris Hazleton, an analyst with The 451 Group. "But they're coming from the largest mobile phone market in the world."

In the last three months of 2012, both companies saw their global market share more than double from a year earlier, though it's still relatively low. Huawei accounted for 5.3 percent of smartphones sold, while ZTE took 4.7 percent, according to data from Canalys.

Their rise to be among the top five is thanks partly to surging sales in China and in developing markets. They also do some business in the U.S., where the companies sell low-end handsets that are often sold under a carrier brand to cost-sensitive consumers.

"We are still new to this market, but we are also gaining momentum and growing fast," said Lixin Cheng, CEO of ZTE's U.S. division, in a recent interview.

ZTE started selling phones in the U.S. in 2008 and works closely with carriers to offer phones that fit with a certain niche. Today, that niche is often the low-end or prepaid market.

Huawei too sells phones under carrier brands in the U.S., and Richard Yu, CEO of the company's consumer business group, also sees the future in more profitable high-end phones that will carry its own brand.

"We are providing a lot of terminals to many carriers, and from them to the consumers, but people don't know Huawei," he said in an interview.

The lack of brand recognition is something of a frustration for executives from both companies. Huawei and ZTE are major suppliers of telecom equipment that runs cellular networks, but to users that's an invisible layer.

"Several billion people are using a service from Huawei, but they don't know it," said Yu. "I want to promote Huawei and our own brand."

A lot of brand-building in the smartphone business today revolves around TV ads. Samsung, Apple and Microsoft ads appear regularly on TV, and BlackBerry just spent several million dollars on a single commercial during the Super Bowl.

"Who is paying for that?" asked ZTE's Cheng. "The consumers at the end are paying. We won't spend that kind of money to build our brand the traditional way."

Instead, Cheng plans to use social media and viral marketing to build the ZTE brand -- a cheaper but potentially riskier strategy.

The companies already scored some online buzz at the recent International CES in Las Vegas, where both announced new products even though they will first be available in China.

ZTE said its Grand S is one of the thinnest smartphones available and Huawei boasted its Ascend Mate has the largest screen of any smartphone, at 6.1 inches. The phones generated headlines across technology blogs, even though there was no information about local availability.

And that could be repeated at next week's Mobile World Congress expo in Barcelona, the largest annual event on the mobile-phone-industry calendar. Both companies plan to announce new products there.

But a great phone isn't enough by itself to crack the U.S. market, said Carolina Milanesi, an analyst for Gartner. Telecom carriers control most of the sales channels, so the Chinese companies must first persuade carriers to offer and promote their phones, then take that message to consumers.

At present, the two companies serve a useful purpose for carriers by helping to keep price pressure on the major smartphone makers, and by providing handsets that might encourage feature-phone users to switch, she said.

"Once you get past the price-sensitive consumers, it's difficult [for other consumers] to see that China means quality," she said. The companies' current smartphones lack the build quality offered by the big players they want to compete against, Milanesi said. But she added that they have started to address this by switching suppliers in some cases to get better components.

Asked about the consumer perception of Chinese companies in the U.S. and Europe, both the Huawei and the ZTE executives were eager to assert the global nature of their companies. Whether it's non-Chinese board members, the number of offices in different countries, or where the stock is listed, both companies say they are global in nature.

The wish to be global extends even to the brand. ZTE recently tweaked the logo it uses overseas to drop two Chinese characters that always appeared alongside the letters "ZTE." Huawei, meanwhile, took to the streets of New York in a YouTube video to find out how many people could pronounce its name correctly (no one in the video could; it's pronounced 'WAH-way').

But that doesn't matter too much, said Johny Johansson, a professor of international business at Georgetown University's McDonough School of Business.

"Once the name comes in, it's established," he said. "If the product works, it really doesn't matter about the name."

"The thing that really hurts a brand is when people say, 'I've never heard of it,'" he added.

Some may have heard of Huawei and ZTE for less than desirable reasons. The companies made headlines in 2012 when the U.S. House Intelligence Committee suggested both companies pose a national-security threat to the U.S. At issue is the extent of their ties to the Chinese government and the possibility that their network switching and routing gear could be used to spy or steal data.

The allegations, which both companies strenuously deny, concerned their network infrastructure business, not their cellphone handsets, and both executives said they are confident the report won't affect handset sales. In fact, Huawei's Yu put a positive spin on it: "Now more people know Huawei," he said.

Ultimately it may be consumers who decide whether Huawei and ZTE become big brands outside China. Despite the size of their home market -- one that many Western companies have been trying to crack for years -- it's clear the Chinese firms have their hopes high for international success.

Success, if achieved, wouldn't be unprecedented. Samsung was top of the South Korean market and decided to move into the U.S. in 1997. Last year, it was the number-one vendor.

Martyn Williams covers mobile telecoms, Silicon Valley and general technology breaking news for The IDG News Service. Follow Martyn on Twitter at @martyn_williams. Martyn's e-mail address is martyn_williams@idg.com

Reprinted with permission from IDG.net. Story copyright 2014 International Data Group. All rights reserved.
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