SMARTPHONES: China’s Meizu, Xiaomi Eyeing US Market?

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Bottom line: Xiaomi and Meizu are trying to expand their exports by working through third-party distributors, and could make a formal entry into the US later this year after studying the market for patent-related liability.

Meizu eyeing US?

After dancing around the edges of the lucrative but extremely competitive US market for much of the last 2 years, fast-fading Chinese superstar Xiaomi and up-and-coming local rival Meizu may finally be preparing to enter the market through tie-ups with local carriers. A flurry of new media reports say the pair of Chinese brands are already making the move via a tie-up that will see their smartphones offered by US Mobile, a virtual network operator (VNO) that uses T-Mobile’s (Nasdaq: TMUS) network.

But no sooner did the reports emerge that Xiaomi issued its own statement saying it had no plans to sell its phones in the US, and that US Mobile was not one of its authorized distributors. Meizu also said it has no announced plans to enter the US. What seems clear from all this is that both companies are probably talking with one or more distributors about selling their smartphones in the US and possibly other western markets, even though neither is quite ready to make a formal announcement.

This kind of entry to a tough market like the US would seem both prudent but also slightly foolish for both Xiaomi and Meizu, the latter of which is backed by e-commerce giant Alibaba (NYSE: BABA). Other Chinese companies, most notably ZTE (HKEx: 763; Shenzhen: 000063), have used a similar approach to achieve big US sales, relying on major local carriers to sell their phones as part of local calling packages.

But as ZTE has found, this particular business model isn’t very helpful for brand-building or profits. That’s because the big US carriers usually insist that their own brand be stamped prominently on the phone, and force the actual manufacturers to add their own brand in much smaller print. What’s more, the big US carriers usually buy such phones in big quantities, and therefore demand steep discounts that mean actual manufacturers get little or no profits from the sales.

Origins in an Ad

All that said, let’s look at one of the many reports that came out earlier this week, saying Xiaomi and Meizu phones would both be making their US debut through a US Mobile tie-up. (English article; Chinese article) The talk began after US Mobile posted an ad on its website featuring Xiaomi and Meizu phones. That ad later disappeared after the reports came out, but US Mobile insisted it was moving ahead with certification for models from both of the Chinese brands.

Xiaomi has been rumored for a while to be studying a move into the US, in a bid to jump-start its earlier breakneck growth that stalled last year due to stiff competition in its home China market. The company’s overseas charge is being led by former Google (Nasdaq: GOOG) executive Hugo Barra, who previously posted photos of himself paying a visit to the offices of Brightstar, one of the world’s top smartphone distributors. (previous post) Since then Xiaomi has gone on to launch its smartphones in a number of other countries, nearly all of them developing markets like India and Brazil.

The company began selling a limited number of its smartphone accessories in the US last year via its online store, but had reportedly worried about vulnerability to patent lawsuits if it formally entered the market. Perhaps those worries were behind the company’s quick response to the original reports of its imminent US entry.

Good Quality, Reasonable Prices

Meizu fits a similar profile to Xiaomi, and is one of China’s better-known homegrown brands with a reputation for good quality at reasonable prices. The company made big headlines last year when it received a $600 million investment from Alibaba. It began exporting phones as early as 2014, and had sold a very limited number to western markets including France and Italy. It was hoping for bigger success last year in India, where Xiaomi has also found a good reception after entering that market in 2014.

All of that brings us back to the latest reports about the US Mobile tie-up. US Mobile insists it will continue to offer Xiaomi and Meizu phones if they pass certification and its supplier has access to the models. That seems to imply that at least one of US Mobile’s suppliers, possibly Brightstar, is already distributing for both Xiaomi and Meizu on a global basis. My own search on Brightstar’s website shows it does indeed offer Xiaomi phones, though there was no mention of Meizu.

At the end of the day I do think that both Xiaomi and Meizu wouldn’t mind entering the US using a distribution partner like Brightstar to raise their brand awareness, though both probably would also worry about patent litigation. Accordingly, both are probably still studying what kind of liability they may face, and one or both could make a formal move to enter the market later this year.

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