Chinese smartphone makers have surged in their home market over the last year, coming from out of the blue to challenge big global names like Apple and Samsung. But their rise could be short-lived if they fail to innovate, paralleling a similar rapid rise and fall a decade ago for names like TCL (HKEx: 2618) and Ningbo Bird that are now just footnotes in the history of China’s large but highly competitive mobile market. The rapid rise of Chinese brands over the last year has been nothing short of remarkable, as China gets set to overtake the United States as the world’s largest smartphone market. At the end of last year, the market was still dominated by foreign names, with Samsung (Seoul: 005930), Nokia (Helsinki: NOK1V) and Apple (Nasdaq: AAPL) occupying three of the top four slots to control more than half of the market collectively.
When ZTE (HKEx: 763; Shenzhen: 000063) warned 2 weeks ago that it would post a massive third-quarter loss, everyone assumed that its smartphone business was partly to blame as the company sacrificed margins in exchange for fast growth. Now it seems that even its smartphone plans were overly ambitious, with ZTE’s newly released official results showing it is likely to miss its smartphone target for the year by a big gap. Meantime, Lenovo (HKEx: 992), still basking in the glory of recently becoming the world’s biggest PC seller, is also making its own smartphone moves with news that it will start to sell its models outside China. I’ll admit I have my doubts about this new smartphone push by Lenovo, as the company has enjoyed far less success with this product in its home China market than with its core PC business.
The headlines today are filled with reports trumpeting Lenovo’s official ascension to the top of the global PC rankings, as the company officially passed longtime champion Hewlett-Packard (NYSE: HPQ) to become the world leading computer seller. So now the next question is: What’s does it mean? Unfortunately, the answer could be “Not much,” as PCs get set to embark on a long-term decline that will ultimate see them go the same way as record players and VCRs as they get replaced by more nimble mobile devices. Over the shorter term, Lenovo will also have to show it has the power to stay at the top before it can claim true bragging rights as the world’s biggest PC seller — a challenge that could be tough for reasons I’ll explain shortly.
E-commerce leader Alibaba loves to talk about how the business model for its popular TMall online mall gives it an edge over most of its rivals by letting it focus on its role as a web mall operator while leaving the actual business of managing online stores to third-party merchants. But the company is much less talkative about some of the downsides to such a business model, most notably the issue of quality control for the products and service provided by thousands of merchants that sell their goods on TMall. A sharp and sudden price hike in store rentals fees by TMall last year provoked a sharp backlash from many smaller merchants, creating huge headaches and a publicity nightmare for Alibaba. Now, many of those same small- and medium-sized merchants, known in the industry as SMEs, are complaining once again about new policies that Alibaba says are designed to improve quality and customer service, even as the SMEs argue those policies discriminate against them and lack transparency. (
Some interesting signs are coming from 2 major Chinese tech firms on the M&A front, with PC leader Lenovo (HKEx: 992) signaling it may finally slow down its acquisition frenzy, even as e-commerce aspirant Suning (Shenzhen: 002024) sends the opposite message with its announcement of a new major purchase. The news from Lenovo would represent a welcome break from the company’s steady stream of acquisitions, which look destined to give the company some major indigestion as it tries to digest such a wide array of assets in a number of very different markets. Meantime, Suning’s purchase of an e-commerce site targeting infants and toddlers isn’t too worrisome by itself, but from a broader perspective also reveals a company trying to grow too big too quickly.
Despite Beijing’s repeated efforts to stamp out piracy, the problem remains a major one in China, with companies large and small, public and private still engaging in a practice that costs software makers billions of dollars in lost sales each year. The magnitude of the problem was on prominent display last week when reports emerged that Microsoft was seeking Beijing’s help to get four major companies, including the parent of PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR), to stop using pirated copies of its popular Office software suite.
