Like most of you, I imagine, I really did not know much, if anything, about the Chinese company ZTE (here)--at least until I read a recent article in Business Week ("Good Times for Cheap Cell Phones", by Bruce Einhorn, May 11th). It turns out that ZTE, which operates in the telecon equipment space, is the world's sixth largest manufacturer of cell phones. That bit of information, by itself, may be of limited interest--after all, China is a huge domestic market with an expanding consumer population. The size figures may simply reflect the position of ZTE in the local Chinese market.
In fact, however, there is an interesting IP angle to the activities of ZTE. As described in the article, ZTE is angling to become the 3rd largest manufacturer of cell phones in the world; if so, it will leap over Sony Ericsson and Motorola in the process. To do so, however, ZTE will need to establish a presence outside of China. The question is--how? More precisely--the question is how to achieve penetration of its brand overseas?
Until now, Chinese companies had preferred to purchase overseas operations and then try to do a better job than the previous Western owner in extracting value from the purchased operation. The results, however, have not been encouraging. As the article points out, TCL bought Thomson's TV business as well as Alcatel's handset units. It appears that neither acquisition has been overly successful. Even the much ballyhooed acquisition of the IBM PC division by Lenovo is stumbling a bit as of late, where it has been overtaken by Acer, the Taiwanese computer company. In the words of the article, this has been a strategy "to grab down-on-their-luck Western brands."
Indeed, it is the ascendancy of Acer in the PC market that highlights the strategic decision before ZTE in its quest for world-ide penetration of its handsets:
(1) Does ZTE purchase an existing handset business and try to revive it under the ZTE brands?
(2) Does ZTE expand, at least initially, by providing handsets for foreign carriers, but allowing the carriers to remove the ZTE mark in favor of the carrier's brand, and only later attempt to build its own brand recognition? or
(3) Does ZTE attempt to develop brand recognition from the outset (and presumably earn the higher margins for the sale of its branded product)?According to the article, ZTE has opted for the second strategy. Despite its size in the handset market, at this stage it is content to sell its product to carriers who will then rebrand the product under their own name. The rationale for this strategy is that, if it is successfully carried out, ZTE will gain market share. Presumably later, if it wishes, it can then try to enter foreign markets under its own name. In adopting this strategy, it rejected the purchase of an existing overseas handset business, such as that of Motorola.
There is a precedent for this--which suggests both the risks and opportunities in adopting such a strategy--namely Acer itself. As I recall. Acer started out as a successful contract manufacturer of computer equipment. In the 1990s it then sought to market its products under its own brand. The move was questioned (Taiwanese companies could never compete at the marketing and distribution level required, it was said) and in fact the first stage effort was not a rousing access. But Acer renewed its efforts, and it would appear that it has now successfully made the transition from contract manufacturer to manufacturer of its own branded products.
here): "Build market share, and the customers for your branded products will ultimately come." But if ZTE is to realize its "field of dreams", it will take time to do so. ZTE may have the benefit of access to abundant capital (the article states that it has a five-year, $15 billion credit line with the China Development Bank), and access to funding is no trifling matter, especially these days. But it will not be enough. Building a strong, lasting, durable brand is always a time-consuming and challenging effort. It took Acer many years to do so, and while it appears that Acer has ultimately succeeded, Acer's success was never assured. I expect that ZTE is in a similar position.