Chinese operators play it smart

Building Brics: As the world's number one market for smartphones, China represents potentially rich pickings for manufacturers. While overseas operators dominate, their domestic rivals are taking on the big-brand names at home and overseas

The use of smartphones is on the rise in China with 42 million being sold in the second quarter of this year. Jerome Favre / EPA

Take the subway in Shanghai, Beijing or any other major city in China and your fellow passengers will be probably be playing with their phones.

Games, internet searches and emails help to pass the time as the train snakes its way from one station to the next.

It is not unusual to see a row of half a dozen seats where every passenger has their eyes glued to their mobiles, preferably one of the latest smartphones, as they press buttons or scroll across the screen with their fingers.

In a country where the enthusiasm for high-tech phones is so visible, it is no surprise China last year overtook the United States to become the world's largest market for multi-functioned smartphone devices.

In the second quarter of this year, 42 million smartphones were sold in China, 27 per cent of the world's total, compared with 16 per cent for the US.

Indeed, almost half of the 195 million mobile phones sold in China from January to June this year were smartphones.

While South Korea's Samsung topped the smartphone sales charts in China with a 17 per cent share, China's ZTE snapped at its heels with 12 per cent and fellow domestic producers Huawei and Lenovo each took a 10 per cent market share.

In China's overall mobile phone market, domestic producers have grown their share from 44 per cent in 2005 to 72 per cent last year and they dominate the lower end of the market.

Competition looks set to intensify, however, as overseas smartphone producers are targeting price-conscious Chinese consumers with budget devices.

Motorola launched its XT390 model in China for 1,000 yuan (Dh577) in April, about half the cost of the cheapest smartphone from an overseas brand until then. It was described by local media as the first budget smartphone sold in China by a foreign company.

It is a worrying development for the Chinese producers as, for many, profits have already fallen despite growing sales at home.

At Huawei, a global telecommunications operator as well as a mobile-phone producer, profits declined 22 per cent to 8.8 billion yuan in the first half of this year, even though revenue increased 5 per cent to 102.7bn yuan.

Similarly, despite becoming the world's fourth-largest smartphone producer in July last year with 15 million units sold, ZTE recently said its first-half profits this year could fall 80 per cent. The warning, which partly cited currency fluctuations, resulted in shares sinking 17 per cent.

While the smartphone market is "very big and growing", companies face intense price pressure, says Steven Liu, a telecoms industry analyst for Standard Chartered based in Hong Kong, resulting in a "very gloomy" outlook in terms of profits.

"The situation competition-wise has a severe impact on profitability, which cannot be offset by volume growth," says Mr Liu.

Facing price pressures, China's smartphone producers are looking to move up the value chain and take on the likes of Apple and Samsung in the premium sector overseas.

Last month ZTE unveiled its Grand X model in the United Kingdom for £190 (Dh1,103), the latest of several handsets it has launched there this year.

Yet encouraging foreign customers to buy premium Chinese-branded smartphones could prove a challenge. Even many Chinese people prefer foreign names.

"I think the bias is widespread … whether it's smartphones or cameras" says Wang Yue, a taxi driver from Yunnan province in southern China who has recently moved to Beijing.

Suo Ying, an accountant from Hebei province, who has a Motorola smartphone, is not keen on Chinese devices either.

"I wouldn't consider buying an expensive Chinese smartphone," she says.

Similarly, Mr Liu believes only "a very small percentage" of overseas buyers like Chinese-branded electronic products.

"I think, [apart from] the cheap price, there's no other appealing factors for the overseas users," he says.

The analysis company IDC made a similar point in a recent report, saying that despite sales growth, "brand equity may prove to be an issue for ZTE in future".

"Strong brand recognition is a necessity if high-growth smartphone sales abroad are a priority for the company," the company said.

In developing markets such as Africa, Asia and Latin America, ZTE and Huawei have, however, generated significant overseas sales by producing customised smartphones sold under the brand of the local telecoms provider.

In Nigeria, Huawei's U8180 smartphone is sold as the Gaga through a tie-up with the UAE's Etisalat.

"In some of these markets, they have a very good relationship with the local operator, like Huawei, which helps with the infrastructure. They can [then] sell customer mobile phones. That's their strategy," says Wang Ying, an analyst with Analysys.

While it will take "a few years" for ZTE and Huawei to be on a par with their Taiwanese rival HTC or Samsung as brands, Mr Liu says these customised smartphone sales will allow the Chinese companies to increase sales overseas.

"There should be ample room for growth for the two companies because they're still selling customised smartphones for overseas operators," he says.

Another Chinese smartphone producer, G'Five, has tapped into the demand for low-end smartphones in India, selling Android models for as little as 6,999 rupees (Dh463).

What is notable is G'Five, which began life nine years ago making mobile phone parts and launched its own brand in 2008, has turned on its head the traditional model of becoming established at home before venturing abroad.

The company is little known in China.

It is now hoping to make inroads at home as well as looking to expand into several more overseas territories.

However, intellectual property conflicts may limit growth.

"Now we are also eyeing the market in countries such as Pakistan, Bangladesh, Iran, as well as some African countries where there are less legal threats from global handset makers," G'Five told China's Global Times newspaper.

It will be a challenge to take on ZTE, Lenovo and Huawei at home but given G'Five's rapid rise so far, its competitors will be watching closely.