Huawei and ZTE: Swapping Networking for Cellphones? 华为和中兴：转型进军手机市场？

By newsdoug on February 13, 2012

Huawei's smartphone play Telecoms superstars Huawei and ZTE (HKEx: 763; Shenzhen: 000063) continue to send out new signals underscoring how serious they are about developing their cellphone business, as both realize that growth potential could be severely limited for their traditional networking equipment business. In yet the latest signal coming from Huawei, the company is bragging that it shipped some 20 million smartphones last year, up 5-fold over the previous year. (Chinese article) That figure was enough to propel Huawei to the world’s sixth largest cellphone seller in 2011, with total cellphone sales jumping 40 percent to $6.8 billion. Of course that is still just a small part of the company’s overall sales, which are now in the $30 billion range. But Huawei clearly has big plans in the cellphone space, saying late last year it aims to become one of the world’s top 3 brands in the next 5 years. (previous post) Crosstown rival ZTE has made similar moves into the cellphone space, and has become particularly aggressive into low-end smartphone by making Android-based models that retail for less than $100. ZTE has also previously said it aims to become one of the world’s top 5 cellphone makers within the next 2 years, meaning that both of these Chinese companies could finding themselves increasingly fighting for the same customers on the global stage. The drive into cellphones, while risky and more competitive than traditional telecoms networking equipment, looks like a smart move for both companies, which increasingly realize that their traditional business is a difficult one with limited growth potential. Most of the world’s major telecoms equipment players are now struggling or have left the business outright, with names like Motorola and Nortel that were dominant players just a decade ago now non-existent. The few remaining names, including Nokia Siemens Networks and Alcatel Lucent (Paris: ALUA) have also struggled to remain profitable, with both making recent layoffs. Even Huawei itself reportedly recently delayed plans for a new factory in the important India market, where new network construction has virtually come to a halt amid a major government corruption scandal. (previous post) The networking equipment business is also notoriously cyclical, unlike cellphones that experience relatively constant demand. With all those factors in play, it’s not surprising to see both Huawei and ZTE looking to cellphones for stability, and I wouldn’t be surprised to see at least one of these 2 companies become one of the world’s top 3 brands in the next 3-5 years.

Bottom line: Huawei and ZTE are pursuing cellphones in response to higher risk and slowing growth in their networking business, with at least one likely to become a top global player in the space.

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