Sunday 21 June 2009

Will the ZTE Brand and Name Find its Field of Dreams Outside China?

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.

Not just an Ace(r), but a royal flush

Based on the Acer experience, the current strategy of ZTE not to promote its own branded products abroad might make sense. As Kevin Costner never said in "Field of Dreams" (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.

Will ZTE find its field of dreams in foreign markets?


Ian Hartwell said...

Interesting post, Neil.

Do you think Acer's experience actually supports strategy 2? Or did Acer find that their contract manufacture experience did not help them as well as hoped (hence the lack of success of their first stage effort) and that they ended up having to develop their own brand recognition, i.e. strategy 3?

Surely "market share" applies to the branded product? Were this not the case, would the likes of HP not compromise their share of the laptop market by outsourcing to the likes of Quanta?

Of course, contract manufacture will allow ZTE to develop the manufacturing know-how that will allow them to price their product very competitively as and when they launch their own brand.

I'd be interested to hear your thoughts.

Unknown said...

I knew about ZTE before I read Neil's posts - I have had to look into some detail at their patent situation in another context. They are also the manufacturers of my 3G/UMTS modem USB stick - as the software continually reminds me (so that I am reminded that the Australian Telstra company did not actually make my product).

I am also intrigued to know ZTE's patent licensing policy. Many of the Asian telecommunications companies have benefited from the lack of patent protection for the GSM system in most Asian countries. They have therefore not had to pay any licence fees (or at least not worried unduly about paying them). Now that the companies are moving west, their strategy of teaming up with the operators will probably also pay off. It seems to me that even if the operators do not benefit from a patent licence, it is going to be a brave patent holder who sues an operators which is also selling products produced by the licence holder.

The future also seems intriguing. I don't know much about ZTE's current patent application filing policy. However their local Chinese competitor Hua Wei last year took the pole position for PCT filings. This suggests a much more active patent position in the future - and certainly a seat at the table in negotiating future patent licences.

Neil Wilkof said...


My recollection is that Acer wanted to break out of the Taiwan/contract manufacturer ranks in the 1990's but found it very difficult to build a brand, develop a distribution change, etc. No surprise--it were otherwise, more contract manufacturers would join the ranks of the higher value branded product purveyors.


Other than Hua Wei, do we have any data on patent filing activity by Chinese companies when seeking to expand beyond their domestic market? Do they merely add to the patent thicket in the industry, or is there something special about the Chinese approach to patent filings outside of China?