Lookout Smartphone Market, The Chinese Are Coming

Includes: ZTCOF
by: D. Mero

If you have not yet heard of Huawei or ZTE (OTCPK:ZTCOF), you will be hearing about them in 2013. These two Chinese vendors are looking to establish a name with US consumers as they seek to mature into global brands. Huawei, the world's number two information and communications technology (ICT) solutions provider and maker of equipment for telecom carriers, has a great influence in China - the world's largest mobile phone market. ZTE, a multinational telecommunications equipment company has also moved into the mobile phone market to expand operations by primarily providing low-to-mid end devices. ZTE and Huawei have become quite the forces in the Chinese mobile phone market, ranking 4th and 5th, respectively, above US megabrand Apple (NASDAQ:AAPL). The companies now have their sights set on the American market.

Both companies have already gotten their foot in the American mobile market by taking center stage at the Consumer Electronics Show in Las Vegas (articles here, here and here). With notable absences of Apple and Google (NASDAQ:GOOG), the Chinese makers took advantage of the opportunity to promote their newly released high-end smartphones. Huawei introduced the "world's largest display" smartphone, the Ascend Mate, which challenges the Samsung Galaxy Note II. In addition, the company intends to launch the Ascend D2, the "world's most powerful smartphone." Although ZTE has not claimed any world leading titles, they announced their new full featured Grand S smartphone as one of the thinnest in the market. With these newest product offerings, Chinese companies are now competing with high end smartphone-makers feature for feature.

Foreign manufacturers face several roadblocks ahead before they can proceed with their invasion into the western market. For instance, in October of 2012, US Congress flagged both Chinese companies as security threats to consumers. Congress believed there to be Chinese government influence within the businesses. These regulatory barriers have raised concerns of consumer security, while also indicating trade protection between the world's two largest economies.

The lack of brand awareness and acceptance are two common struggles foreign companies face when expanding into a developed market. This can be traced to Japanese electronics back in the 80s, and more recently, the HTC branded smartphone in 2006. At their respective introduction into the US market, these brands were considered unknown and unreliable due to their cheap manufacturing backgrounds. Nevertheless, with consistent innovation and marketing, the Japanese technologies dominated global production for over two decades and the Taiwanese smartphone manufacturer reached a peak of 12% market share in the US during 2010.

However, consumer reaction to these advancing Chinese technologies has yet to be seen. Brand acceptance of Chinese technologies will have to overcome a biased reputation of fallibility and inferior quality. On top of that, a lack of brand awareness in the US market will add little support to either Huawei or ZTE's reputation. To rid this prejudice, both Chinese manufacturers will have to increase exposure of their product, as the main focus of both companies is to establish relationships with US mobile service carriers.

In this recent interview, ZTE US chief Lixin Cheng signified the importance of signing with a big four carrier as the key to success in their western expansion. The company is currently working to address carrier needs for a potential launch of their Grand S phone later on in 2013. This is a crucial step for the Chinese manufacturer as carriers purchase the majority of phones, which are then sold to consumers. By successfully being implemented into a large carrier's system, ZTE can increase their exposure to the brand conscious consumer of the high end smartphone segment. Greater publicity will only be beneficial for the company as it would minimize lack of awareness and acceptance of launching in a new market. In addition, company advertising budgets would be reduced as the carriers would share in the cost of commercializing the product. Agreements with large US service providers would boost ZTE in their goal to double their US handset market share to 10% by 2015.

Huawei is facing a similar situation to ZTE; needing to increase brand awareness across the US market. Developing relationships with US mobile service providers will expose Huawei to gain greater brand recognition and as a result, a greater market share of the US mobile market. Due to its size, ample resources (profits of $1.85 billion) and ambitions to breach the American mobile market, Huawei will splurge on advertising their products to their new target consumers. Before executing such a brute marketing strategy, influential carriers will need to be supporting the newly released high-end Ascend models.

And yet, the Chinese players may need more than carrier contracts and feature filled phones to break into such a brand-conscious market. The smartphone field is full of players seeking to recapture past glory such as RIM's (RIMM) much anticipated BlackBerry 10 and Nokia's (NYSE:NOK) road to relevance. To induce the cult following of already established names, such as the ones mentioned above, ZTE and Huawei must offer their high end smartphones at a discounted rate. This would slowly attract the bargain consumers and those without contracts, which in turn will enhance the hype factor of the new players. After all, price is king. A quality product tagged with a lower price than competitors will be hard to ignore, even if, at first, the brands remain relatively unknown.

With Samsung and Apple controlling the top two positions in the US smartphone market, the battle for third is up for grabs. As competition heats up in a continuously saturating market, consumers should be looking forward to 2013 as this struggle for market share benefits the buyer with increased innovation and lower prices. Established firms like RIM and Nokia face uncertainties with their new devices (BB10) or operating systems (Windows 8) whereas the likes of Motorola and HTC seek to become relevant players a second time around. This volatility proves to be favourable for new entrants to compete in the market as current players struggle.

We've yet to see how the new Chinese players will affect the smartphone market. However, with continuous innovation and additional brand awareness from a possible carrier partnership, a dent can be put in the American market share. These potent Chinese companies have made it clear that their next sight is set on the western mobile market. If the upcoming releases of established names prove to be subpar, both ZTE and Huawei offer cutting edge technology westerners have grown accustomed to. By staying on top of consumer demand while offering high end phones at discounted prices, ZTE and Huawei could become household names in 2013.

In other words, the Chinese are coming.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.