CELLPHONES: LeTV Sells Out, Lenovo Posts Loss, ZTE Eyes US
Bottom line: LeTV’s strong smartphone launch shows that stiff competition in China won’t ease soon, which could push Lenovo’s mobile operations further into the red and prompt ZTE to further lighten its efforts in the market.
A series of smartphone items are in the headlines as we close out the week, spotlighting the tough situation in a China market that is at once the world’s largest but also extremely competitive. That competition just got a bit louder, with the first headline that says new arrival LeTV (Shenzhen: 300104) debuted quite strongly with when its first smartphone models went on sale this week. Meantime, industry stalwarts Lenovo (HKEx: 992) and ZTE (HKEx: 763; Shenzhen: 000063) continue to reflect the stresses of selling in China, with the former posting a big loss for its mobile business last year while the latter continues to lighten its reliance on the market by looking for growth in the US.
I’ve written quite extensively on the rampant competition in China’s smartphone market, which has been intensifying for the last 2 years but has yet to claim any major victims. That’s because most players have major cash-rich backers, who all believe that smartphones are a critical component for the future survival of any Internet or other new media company. Therefore those wealthy companies are prepared to suffer growing losses in anticipation of a day when the rampant competition might finally subside.
But that day doesn’t seem to be arriving anytime soon, and the competition has actually just gotten stiffer with the new release of smartphones from LeTV, which has recently risen to challenge incumbent Xiaomi for the title of “cool kid on the block”. LeTV began taking online orders for its 2 new models earlier this month, and now is saying that 200,000 handsets on offer sold out within 4 minutes when sales officially began on Tuesday. (English article)
LeTV went on to say it is aiming to sell more than 3 million smartphones this year, and most or all of that figure will probably be in China. That’s a relatively small figure for a market that logged nearly 100 million smartphone sales in the first quarter alone. But it’s hardly a good sign for companies that were hoping to see rivals start to leave the market, rather than new players enter.
Next there’s Lenovo, which released its latest quarterly financial report that showed its mobile group posted a $370 million pre-tax loss for its latest fiscal year that ended on March 31. (company announcement) Lenovo pointed out that revenue for the unit rose 71 percent to $9.1 billion from the year, as it included sales from its recently acquired Motorola brand in the last 2 quarters.
But one report points out that China still accounts for about 60 percent of Lenovo’s smartphone sales, meaning the mobile unit could continue posting losses that will eat into the company’s profits this year. CEO Yang Yuanqing is also cited in an interview complaining about unnamed rivals making exaggerated claims and engaging in other irrational behavior to stir up the market. (Chinese article)
Finally there’s ZTE, which was quite smart in its decision last year to scale back its efforts in China to focus on other markets where competition is less fierce. It has apparently decided the US is one its primary new targets, and has disclosed it is seeking new endorsement deals with the NBA to boost its presence in the market. (English article) The company already has 3 such deals, including a highly hyped one with the Houston Rockets announced in 2013 (previous post).
The pursuit of NBA sponsorships is part of ZTE’s broader goal of becoming the third largest US smartphone player, moving up from its current position as a distant fourth with 6 percent of the market, behind leaders Apple (Nasdaq: AAPL), Samsung (Seoul: 005930) and LG (Seoul: 066570). This is probably the first time I’ve seen someone look to the US for relief from competition elsewhere, but in this case ZTE’s view is probably correct. Of course the US will pose other challenges, including the possibility of patent litigation. But at least ZTE won’t need to compete in the price slashing and other hype that is clearly frustrating companies like Lenovo that rely heavily on China.
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