CELLPHONES: Gree Joins China Crowd, ZTE Calls On Japan
Bottom line: Gree’s launch of a smartphone line is far too late and could signal the start of a major shake-out for the sector, while ZTE’s move into Japan will be tough but could reap big rewards if it can gain traction.
You know China’s smartphone market is due for a major correction when a stodgy home appliance maker like Gree (Shenzhen: 000651), better known for its air conditioners, enters the market. But that’s exactly what’s happened, in a move that has the word “dud” written all over it. Meantime, the more established smartphone maker ZTE (HKEx: 763; Shenzhen: 000063) is making a risky but wiser move by targeting the lucrative but often ignored Japanese market, as it looks for growth alternatives outside a Chinese market that is the world’s largest for smartphones but also incredibly competitive.
When the history books are written, this move by Gree into smartphones could well become a turning point that marked the start of a much-needed clean-up of China’s hugely overcrowded smartphone space. That’s because this kind of boom-bust cycle is quite typical for new product areas in China, and the arrival of stodgy and peripheral state-run firms to the mix is often a signal that things have finally reached a meltdown point.
I should start by saying I have a lot of respect for Gree and its chief Dong Mingzhu, who is often called China’s most successful businesswoman. But Dong has made a few major missteps in the last few years, starting with a 2013 bet that saw her hugely underestimate the potential for growth in the smartphone market. (previous post) Now she seems to be trying to make up for that miscalculation with Gree’s late move into the space.
Media began reporting this move earlier this year, and now the latest reports are saying Gree has officially shipped its first batch of smartphones. (Chinese article) Gree has set fairly modest targets for the phones, with reports saying initial shipments will total less than 100,000 units. That’s probably a smart move, as I doubt that very many people will buy the phones, not because they’re low quality but because the market is so crowded right now with models that all look and perform quite similarly.
In a curious twist, none of the people quoted in the latest reports seem to know exactly when the phones will go on sale. Gree certainly has plenty of potential partners to sell the phones, since its air conditioners and other traditional home appliances are already available in most major electronics chains. Still, I doubt those chains will give the phones much shelf space, and predict this foolish campaign could get scrapped within a year.
Next let’s look at ZTE, which was one of the earlier entrants to the China smartphone space but has wisely chosen to scale back its efforts in the market over the last year as competition grew intensely fierce. The company’s new focus on Japan comes in a new report on its broader target of boosting its smartphone sales by 25 percent this year to 60 million units. (English article) Within that figure, ZTE is aiming to sell 10 million phones in Asia, with Japan as one of its most important regional growth markets this year.
The company hopes to achieve that goal in part through a partnership with NTT Resonant, a unit of the country’s leading carrier that focuses on web portal content. Such a strategy looks similar to what ZTE has done in the US, where it has partnered with local telcos to give it quick major access to the market. The downside to such a strategy is that profit margins are typically smaller, and its partner telcos often insist that phones be co-branded with their own names.
Japan certainly looks like a good market for ZTE to target, as none of the other big Chinese brands have made much progress there. Apple (Nasdaq: AAPL) is the only foreign brand to post much success there, and instead the market is dominated by fading Japanese names that have mostly disappeared from the rest of the world. Of course there’s no guarantee that ZTE can succeed where others like even Samsung (Seoul: 005930) have failed; but at least it’s getting creative by choosing a good local partner and moving early to a market that theoretically has big potential.
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