CELLPHONES: ZTE Chases Simplicity, Seeks A Voice
Bottom line: ZTE’s decision to slim down its cellphone product line and focus on 4 key areas looks like a smart formula for success, but its big bet on voice could bring trouble if the technology fails to gain momentum.
After a painful but necessary restructuring, telecoms stalwart ZTE (HKEx: 763; Shenzhen: 000063) has largely withdrawn from the price wars that have plagued China’s smartphone market and is focusing on a strategy that emphasizes simplicity and higher-end products. The simplification strategy takes its cues from Apple (Nasdaq: AAPL), whose focus on just 2 or 3 new smartphones each year contrasts sharply with the many different models rolled out by its now-struggling chief rival Samsung (Seoul: 005930).
I quite like the simplification strategy for a number of reasons, even though consumers ultimately get less choice. Fewer models lowers product development costs, and allows a company to focus on a smaller number of phones with better designs. Such a strategy also creates stronger focus in consumers’ minds, which in turn helps to build a brand’s identity and the kind of customer loyalty that Apple has found.
Of course, none of this really matters unless you have a really solid product, which is the main reason Apple has done so well and can charge a big premium for its iPhones. In that regard I’m still not convinced that ZTE has created products that are truly distinct and deserving of the premium image the company hopes to build. It’s placing one of its biggest bets on voice technology, which looks intriguing on the surface but may face a big uphill battle for acceptance among mainstream consumers.
I got to learn about ZTE’s smartphone overhaul in an interview Adam Zeng, who took over as the company’s consumer products chief less than a year ago as part of a major overhaul that helped ZTE return to an operating profit in 2014 after posting a massive loss a year earlier. (previous post) Zeng has put ZTE’s cellphone division on a major diet, slimming down the number of models rolled out each year from more than 100 in 2013 to around just 10 per year now. He’s also largely taken the company out of the low-end of the China smartphone market, where rampant competition has eroded margins and pushed prices to as low as just 500 yuan ($80) per handset.
At the same time, ZTE is focusing its cellphone business around 4 major areas, 3 of those under its Star, Grand S and Blade sub-brands, and the fourth under its separate Nubia brand. Among those, ZTE has the biggest hopes for Star as a break-out brand that can become a leading innovator in the emerging area of voice technology. Its big hopes for Star were reflected in its staging of a glitzy event this week on the sidelines of the Mobile World Congress, where it highlighted the ecosystem it hopes to build around Star through a coalition of partners engaged in voice technology.
So, what do I think of all this rejiggering? As I’ve said above, the strategy of focusing on a smaller product stable looks smart, which is reflected by Apple’s success. But I’m just slightly skeptical of the decision to focus so much on voice, even though such technology will clearly be an important part of future cellphone design. Perhaps I’m being old fashioned, but I honestly can’t imagine a world where people are constantly “talking” to their cellphones the way they would to other human beings.
Many people already feel awkward about holding private conversations over their cellphones in public, and forcing them to speak to their phones would just make them feel more uncomfortable. By comparison, touch-based technologies allow for more privacy, even in public places.
I remember a time when people thought it was awkward to talk to telephone answering machines in the 1980s and ’90s, even though they eventually overcame their reluctance. But now the pendulum has swung back towards more private forms of communication, and a wide array of texting options have replaced most forms of voice messaging. At the end of the day, only time will tell if consumers warm up to voice as one of their main ways of interacting with their phones. If that happens ZTE could be well positioned to capitalize. But if it doesn’t the company could find itself having to take more write-downs.
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