Not sated with rolling out 3G and network infrastructure from Brazil to Yemen, the Middle Kingdom’s two telecom giants, Huawei and ZTE, are chasing supremacy in smartphone sales to the developing world’s rapidly modernizing consumers. Though no panacea, affordable mobile phones are a boon for developing world consumers and can translate to both economic and personal freedom, enabling individuals not only to communicate, but also to improve agricultural processes, personal finance and education.
Huawei and ZTE could yet play large roles in empowering the economically disadvantaged at home, in Africa and elsewhere. According to a DigiTimes article citing Taiwan-based manufacturers of phone components, Huawei and ZTE will ship a total of 95-100 million smartphones for a combined global market share of 15% in 2012. Contrast this with Huawei’s 16 million and ZTE’s 11 million in shipped smartphones for 2011, which ranked the companies ninth and tenth, respectively.
In February 2011 Huawei made a big splash in Kenya by partnering with Safaricom, the country’s leading mobile service provider, to offer the Android-based Ideos smartphone for US $80. While one widely-circulated estimate put the total at 350,000 units sold in the first six months, the number is uncorroborated by Safaricom’s CEO and appears to be closer to 210,000 devices for a 45% slice of Kenya’s smartphone market. The company has since released an upgraded model for the Kenyan market, the Y100. In 2011, The Wall Street Journal reported that Huawei was attempting to harness the Ideos’ momentum in Nigeria with an advertising budget of US $1 million, but results have been less fruitful as retail prices exceeded the US $100 tag targeted by Huawei.
Huawei and ZTE have both signaled a strategic shift in moving up the value chain as they simultaneously target budget smartphone customers. Huawei teased a penchant for innovation with the unveiling of the Ascend D Quad, called the world’s fastest smartphone, but delays in mass production have seen it lose both market share to Samsung’s Galaxy SIII and potential “wow” factor among consumers. While both companies have grown on the back of Google’s Android, Huawei and ZTE are also cooperating with Microsoft. Huawei is building a new Windows Phone 8 Ascend handset while ZTE offers a lower-cost Windows option called the Orbit.
Eager to make their footprints abroad, they must be wary of new rivals at home. Android-based gaming company Animoca released an infographic based on user data that illustrates Samsung’s dominance in a number of Asian countries—both in high-end and low-end smartphones. India is the only country where the low-end smartphone offering is the most popular (the Samsung Galaxy Y with 18.2%). The race is closest in China: the most popular Android option, the Samsung Galaxy SII, is only 4% more popular than the sixth most, the Melzu M9. More competitors are set to join the fray. Chinese appliance giant Haier, who has manufactured refrigerators in the U.S. for over a decade, is teaming up with Alibaba’s cloud computing arm to offer an affordable smartphone running the Aliyun cloud-based mobile operating system. Targeting China’s higher end customers at over US $300, Xiaomi’s newest release, the Mi2, arrived to much fanfare. It boasts a quadcore processor, 8 megapixel camera and runs on Android’s Jellybean.
Those crowding the gold rush may be holding their shovels a while longer. Strategy firm VisionMobile put global smartphone penetration at 30% in 2011, and the rate is predictably lower in developing regions—Asia (19%), Africa (18%) and Latin America (17%) have all seen relatively limited adoption. The VisionMobile report credits ZTE and Huawei with 4% and 2% of total mobile phone market share, respectively, with the two companies each enjoying a 3% slice of the global smartphone market in the fourth quarter of 2011.
More recent data from market intelligence firm IDC ranks ZTE in the top five for global smartphone market share with 5.2% of shipments in the second quarter of 2012, at the heels of HTC (5.7%) and Nokia (6.6%). IDC credits ZTE’s domestic sales of budget smartphones and growth in Latin America for the improvement. ZTE’s overall mobile phone share stands at 4.4%. (Huawei is one of many companies comprising the “Others” segment.)
How quickly will the developing world join the smartphone revolution? Whether in Africa, Asia or Latin America, consumers have unique mobile problems that otherwise omnipotent smartphones can’t solve. Market conditions in some regions require expansive battery life (57% of sub-Saharan Africans have cell phones but only 30% have power), hardware durability in harsh climates and low data consumption, as data cost reductions likely can’t keep pace with declines in handset prices. Data consumption could be reduced with platforms that make apps more efficient or the emergence of HTML 5 mobile sites, which cache more data compared to apps that constantly download new content. However, battery life remains a limiting factor for smartphone adoption. Consumers could also have the alternative of making their feature phones smarter with services that redesign apps, a concept backed by Google’s Eric Schmidt.
In How the future of mobile lies in the developing world, UNICEF’s Erica Kochi argues that the utilitarian Nokia 1100 series best meets the needs of developing world mobile customers—offering week-long battery life, a powerful flashlight and great durability. Albeit somewhat unscientific, IT News Africa’s list of best-selling handsets unsurprisingly mentions several Nokia feature phones, including the Romanian-made Xpress Music 5130 and the classic 2700. The good news for Huawei is that the list also includes the Ideos.
Huawei and ZTE have their work cut out for them. Unlikely to gain a big foothold in the feature phone market dominated by Nokia’s time-tested performers or challenge Apple and Samsung on an innovation-basis, they must contend with an ever-expanding kitchen sink of competitors at home and succeed with invisible margins abroad. Lacking in brand equity, Huawei and ZTE must either take smarter gambles on R&D and advertising and time product releases better or continue to grow the low-end smartphone market segment with affordable prices, service-provider relations and battery life solutions. Although Nokia continues to flounder with turnaround aspirations on the high-end amid uncertain profitability, the Finnish company should continue to squeeze what it can out of feature phones for the next few years, especially given that more than 3 billion people still do not own a mobile phone.
Continued economic growth in the developing world could provide a fertile market for Chinese-brand smartphones priced around US $75-130. Increasing urbanization (better service, electricity), conspicuous consumption (desire for status) and network effects (need to be in the loop) could also quicken the smartphone adoption rate.
But will more market share be medicine enough for the low-margin cost differentiation strategy? ZTE’s plummeting profitability, a quarterly drop of 85% that was in part the result of handset competition, portends an unsustainable business model. Unsurprisingly, the aforementioned Vision Mobile report brands ZTE and Huawei as “low cost assemblers” when compared to the “fast moving challenger” (Samsung) and “Innovator” (Apple) (the latter two companies collecting 99% of handset profits in Q1). That’s a title the Chinese heavyweights will need to lose should they want to leave their days of slim margins behind.