CELLHONES: ZTE Looks for New Start in China
Bottom line: ZTE’s new campaign in its home China smartphone market looks relatively well timed if a wave of consolidation starts by year-end, but it could miss its annual sales target if the competition doesn’t start to subside soon.
After quietly falling out of the top 5 in its home smartphone market over the past 2 years, telecoms stalwart ZTE (HKEx: 763; Shenzhen: 000063) is gearing up for a new push with an aim to become one of China’s top 3 players in the next 3 years. That’s the message coming from Adam Zeng, who has been working hard to breathe new life into ZTE’s smartphone business since taking over the company’s mobile device unit about a year ago.
Zeng detailed his plans for me in an interview last week, including his attempts to go upmarket with a new line of smartphones and also a broader blitz of new models slated for release in China later this year. In my view, ZTE was quite wise to scale back its smartphone campaign in China over the last 2 years, as the market became incredibly competitive with a wide range of established and new names all competing for space.
We have yet to see any major casualties of intense competition in China, which leads me to slightly question ZTE’s timing for this push back into its home market. But that said, the company really can’t just wait on the sidelines forever, and it’s possible we may see one or two smaller or even mid-sized players call it quits in China before the end of this year.
All that said, let’s look more closely at some of the numbers that Zeng was giving for ZTE in the recently-ended first half of 2015, including the headline figure of 26 million smartphones sold during the period. That’s less than half of the 60 million phones that ZTE has targeted for all of 2015, though Zeng said he was still confident of meeting the full-year target.
Within that total sales figure, the company posted healthy gains of nearly 200 percent or more in its up-and-coming markets of Asia, Europe and the Middle East during the first half of the year. Zeng wasn’t giving figures for the US, Zeng’s second most important market outside of China, but reiterated previous figures saying the company’s smartphone sales there grew 41 percent in the first quarter.
But Zeng was less talkative about his company’s performance in China, only acknowledging that sales in the market were down in the first half as the company focused on improving its overall positioning. Zeng did point out that ZTE’s average selling prices (ASPs) in China grew 8 percent in the first half, which is admittedly no small feat for a market where almost everyone is feeling downward pressure.
Going Up-Market
So, why is Zeng feeling so confident that he can meet his full year target, and also return ZTE to top 3 brands in China over the next 3 years? The answer seems to be in a strong push to the higher end, which is coming with the company’s newly announced line of phones called Axon. ZTE will roll out the first Axon phones in the US and China this month, priced at $349 and $449 and a target of 1 million unit sales over the life cycle of the products.
Zeng appears to taking some of its cues on Axon from Apple (Nasdaq: AAPL), the company everyone wants to imitate, starting with its choice to outsource manufacturing of the phones to Foxconn (HKEx: 2038), one of Apple’s iPhone production partners. In another signal that ZTE really wants to focus on quality, Zeng pointed out that Axon’s original release date was slated for last September, but has been moved back continually because he really wants to do the job properly.
So now that I’ve given this much space to discussion of Zeng and his plans, I’ll close by giving my own assessment of the strategy. As I’ve said above, the timing for this new China push could be slightly early, but I do like the attempt to move up-market and away from all the cheap lower-end smartphones in China that all look alike. I don’t know if ZTE has the savvy it will take to ultimately succeed in the ultra-competitive global market over the long-term, but at least these initial steps seem like good moves in the right direction.
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