ZTE, HTC Reflect China Smartphone Stress
I’ve been saying for a while now that China’s booming smartphone market will undergo a major correction soon due to huge oversupply, and now we’re starting to see the first signs of stress from 2 major players. Among domestic manufacturers, media are reporting that struggling giant ZTE (HKEx: 763; Shenzhen: 000063) is preparing an overhaul of its handset business to improve its performance in China. Meantime, faded Taiwanese superstar HTC (Taipei: 2498) is also announcing its own major overhaul and making bold predictions about its plans to become a top player in China.
The bigger picture in all this is that China’s smartphone market has zoomed over the last year on a flood of cheap new models entering the market, many of those costing well under 1,000 yuan ($160). The flood of new models is mostly coming from domestic newcomers such as Lenovo (HKEx: 992), Huawei and Coolpad, and is putting China on track this year to overtake the US as the world’s largest smartphone market.
But the huge surge is also leading to stiff competition, as everyone battles for market share with models that often look and perform similarly, since most are based on Google’s (Nasdaq: GOOG) free Android operating system. As a result, previous reports have said that inventories are building at many companies, forcing them to lower their prices. Amid such stiff competition, I suspect that many smartphone makers are now selling their phones at around cost, or perhaps even a loss.
That stiff competition is most likely a big reasons behind the media reports of the latest reshuffle at ZTE, which plunged into the loss column last year due to sluggish demand for its core telecoms equipment and high costs associated with its cellphone business. The reports are rather vague, citing a ZTE executive saying the company will reorganize its handset business to better meet demands in its home China market over the next 2-6 years. (English article)
ZTE is currently the fifth largest smartphone maker in China with 6.3 percent market share, about a third of Samsung’s (Seoul: 005930) market-leading 18.6 percent and half of Lenovo’s 12.4 percent. To me this reorganization looks like a strong sign of distress, which could easily be followed by a pullback for the company in China next year if the competition doesn’t ease.
From ZTE, let’s move on to HTC, the former smartphone pioneer that has fallen onto hard times lately. HTC is putting big hopes on China to revive its fortunes, naming a new China head last week and this week detailing new plans for the market. (English article) Analysts say the company, which isn’t even a top 10 player in China at the moment, has suffered due to poor marketing and weak distribution channels.
As part of its revival plan, HTC is dumping its previous slogan of “Quietly Brilliant” in favor of the louder new mantra “Here’s To Change”. If all goes according to the plan, the company is aiming to be one of China’s 3 biggest smartphone brands in the next 2-3 years.
So, what are HTC’s chances of succeeding in China? I would put the odds of success at just over zero, perhaps at around 5 percent. China is already so intensely competitive at both the low- and high-ends of the market that HTC will have a very difficult time finding a niche for its products and will have to spend heavily for any share it can get.
The only way the company could potentially succeed is if all the current players end up driving each other out of the market in the current price wars, leaving HTC to come in and quickly grab share after the competition fades. But I doubt that will happen, since names like Huawei and Lenovo have very deep pockets and seem committed to staying in the China smartphone market over the next few years.
Bottom line: The latest moves by HTC and ZTE reflect building stress in the China smartphone market, with a major shakeout likely in the next year.
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