The certainty of unforeseeable growth: The rise of ZTE and Huawei

  • According to rumors, Huawei shipped 30 million phones last year. The target for this year is 60 million of which 15 will be smartphones.
  • According to IDC ZTE is now the fourth largest mobile phone vendor with 51.8 million units in 2010. Assuming 70% for 2011, ZTE could ship 88 million units in 2011, 25 million of which would be smartphones.
  • These data imply that ZTE and Huawei will ship nearly 150 million phones in 2011 of which 40 million would be smartphones.
  • That would imply approximately 7% share of the global smartphone market for these two companies together.

What is remarkable about this is that the market share of these vendors was zero in the previous year.  It’s hard to get comfortable with this market entry. The challenge for forecasters and analysts is that there is little history to draw upon. How will the entrants affect the rivalry between firms? Will the distribution be overlapping with incumbents or will the entrants be competing with non-consumption?

The only thing we can be certain of is that the adoption of smartphones is increasing at a faster rate than is foreseeable.

  • djbtak

    Exactly. Your post is tagged "theory", but this is some pretty major reality. A good example of how basing projections on "hard numbers" gives the illusion of reality based on the past, but the real reality is not that unforseeable: most consumer electronics are made in China, only the most starry-eyed Eurocentric wouldn't see that country as being able to dominate handset manufacture in the future.

    • arvleo

      True…also we have to keep in mind that its not just ZTE & Huawei but the Chinese Govt as well.
      ZTE with revenues of ~$8billion gets a line of credit of $25billion & Huawei ~$30billion from the nationalized banks which is huge money to fuel growth.

      • asymco

        Do you have a source for these loan figures? Would like to confirm.

      • arvleo
      • Narayanan

        This is not to play down their low cost manufacturing processes, supply chains but with that kind of cash injection, no surprise they can afford to sell at such low prices and possibly even take a hit in the market share grab game.

        From this light, I can see while Elop made a more risky bet, but at least he is not going to be drowned in the Android deluge.

      • Evan

        First China, then India, just wait till all our jobs go to India or China, except for top level jobs like CEOs or upper management. Basically the printing press of US is responsible for most of it, US prints and prints more and more dollar currency, which is soaked up mainly by China as most US folks buy stuff from China. Any other country printing more and more currency will end up with crushing inflation, but not US, as China is soaking up all the extra dollars. China flush with huge dollars reserves does not know what to do, it then loans huge amount to huawei, ZTE because they can which will then end up costing US jos.Japan or Singpaore is not a problem for US, because their population is not growing and unemployment rate is low, but China and India will need to manufacture jobs, else they will end up with civil wars like in the Arab states. Because dollar is the world currency reserve, nobody will attack US, but jobs will vanish. Very unstable situation, will have to wait and watch, how it stabilizes. Before long, lot of US corporations will be owned by Chinese I guess

      • asymco

        Yes, you do seem to be guessing a lot.

  • danthemason

    I wonder how much international scrutiny is applied to the treatment of labor and environmental issues by these powerhouses.

    • Kizedek

      None. Only when their workers produce an Apple branded product — then everything is scrutinized: do they have nice music in the bathrooms; are the snacks in the vending machines stale; do they have scented hand cream at every workstation…

      • terrobit

        There's clearly going to be an additional focus on US firms who have outsourced their manufacturing out of country, than those firms producing things in country.

    • Charel

      In 1850 in Michigan a 10 year old worker in the textile industry earned $2 a day. Don’t blame China for it’s low wages compared to the developed world. Blame the US corporations that abuse this situation at the expense of the US workforce in their hunt for maximum profit.

      • Joe_Winfield_IL

        I think blaming either side exclusively is narrow-minded. US companies certainly take advantage of the situation, but the situation does not exist as a result of multinationals. Everything is relative, and in China the living wage is considerably lower than in developed western countries. These factories aren't struggling to find staff to fill the millions of positions required for assembly and manufacturing.

        Maybe I'm naive, but I think things will run their course. I believe that wages will rise over time as China continues to modernize. The textile industry has already begun to hedge against wage inflation, moving considerable production capacity to other Asian nations. To suddenly force Chinese labor into compliance with US/European standards of pay and benefits would kill these businesses and leave untold millions of workers unemployed. It would also dramatically increase the cost of goods globally and have horrendous inflationary effects. Better to keep gently pressuring and monitoring for abuse.

        The US in 1850 was a very different place than in 1950, let alone today. I'm not sure how comparing this to modern China is relevant.

      • airmanchairman

        Too true. The blame game is an exercise in futility because Big Business and governments pay no attention to the plight of the losers in the game of profit-hunting. This is as true today (if not more so) than it was in the late 1800s.

        Programs of action by enlightened individuals within and without the industries to bring about reform and change worked in the past, and will work again, once heroes and heroines step forward in the name of the greater good rather than in narrow self-interest. Governments will never set the ball rolling because it is not in their DNA to do so, although it most certainly is in their written job description so to do.

  • FalKirk

    You're famous for your charts, Horace. A couple of simple charts might have illuminated and highlighted the dramatic turn of events you described in your article. Not a criticism. Just a suggestion from some one who admires your work.

  • eyez00

    Positive news for smartphone customers! New entrants will have lower price points. Greater component demand will drive manufactuering costs down (albeit at a labor & environment cost danthemason).

    • Pieter

      'New entrants will have lower price points'
      Not always, the iPhone in 2007 definitely did not have a lower price point…

      (Also, a too low priced smartphone can become 'cheap' and give a disappointing experience…)

      • eyez00

        Did I use "always"? I was implying that the Chinese smartphone makers will compete on price and thus put pressure on all makers, Apple included, to reduce or at least mantain current prices.

        Are you suggesting ZTE will produce a smartphone that distrupts the smartphone market in the same way as the iPhone did & can thus set a new top price point?

        Can I suggest you read past Asymco posts to understand why this isn't 2007 but 2011?

        ZTE fanbois eh? <indulgent smile>

      • Pieter

        Your implication was a bit thin. Apple was new, but not really lower price point…
        I really doubt that Apple will feel pressure from low prices from other companies.
        See… for the last 4 years…
        (If you would have said 'These new entrants will have lower price points.', I would have agreed with you)

        I think companies such as ZTE can indeed disrupt the phone market by introducing a cheap, but 'good enough' smartphone that will eat feature phone share. If those new processors from e.g. Broadcom that are coming now allow a 85 dollar smartphone, the 60 dollar feature phone is toast.
        They can indeed set price, but not at the high end…

        I have indeed read most of Asymco's posts, it is one of the pages I open as part of my 'daily dose of internet addiction'…
        Very interesting statements every time!

        I would not classify myself as a ZTE fanboi.
        I would say that people around me classify me as an Apple fanboi, although I always claim to just want to have products that actually work, work together and are user friendly…

    • airmanchairman

      And positive news for lovers of quality too – the high-end occupiers will have to scramble to do more by way of differentiating their product from the "hoi-polloi" leading to more "magical" features and breakthrough usability technologies.

      And the game goes on…

  • Anon

    According to whom?

    “According to ZTE is now the fourth largest”

  • Xavier Itzmann

    Google has unleashed a monster. By creating and giving away Android, it has effectively performed the largest consumer R&D knowledge transfer in consumer product history.

    Without Android, these Chinese firms would either be dependent on developed world licensing or would have to design their own… which is such a tall order it has doomed even the likes of Euro Nokia, US Motorola, and Japanese SonyEricsson.

    • airmanchairman

      Worse yet, Google may not eventually profit from this proliferation in the self-centred way that it has intended, as stock Android is being forked into several variants that exclude it from the advertising, licensing and data-harvesting bonanza that is its original goal.

      I wonder which South-East Asian corporation will pick up the pieces of this strategy and press on with it, to their benefit and the detriment of all others. What a random scenario appears to be unfolding all of a sudden!

  • HTG

    Well I wouldn't get too carried away… almost all of these phones will be going into India and China where there is rampant demand, but low prices and hence low margins. The growth is 'explosive' because it is coming off pretty much a zero base. So it all looks 'huge'…

    Apple is also having 'blow out' quarters in China and one has to assume India will also be a major focus for the company, so there is growth to burn…

    The more interesting analysis will come when the market has had its initial fill and it becomes, like the US and Europe, far more of a replacement market – then the real competition will begin…

    • Jarkko

      Actually they are not necessarily selling all to India and China. ZTE and Huawei sell a lot of their phones as part of their networking deals. So when they sell a network, the network gets some phones on top of that. Because the phones come at essentially zero cost to the operator, the operator will push these handsets to get better profits.

      This is already reality in Europe. One of the best selling phones from one operator here (Finland) was a ZTE (or was it Huawei don't remember). That even without getting a network deal.

      They do naturally sell direct as well, but the abovementioned helps in getting volume.

      As for growth. Yes from zero base, but a combined 80M units first year is not bad by any measure.

      • Same in the UK. Orange rebranded the ZTE Blade Android handset. £99 pay-as-you-go for an 800×480 Android phone which got good reviews too.

        I imagine Nokia Siemens Networks would be doubly pissed off with that if ZTE also sold Orange infrastructure hardware to get the cheap phone deal.

  • davel

    are either of these two companies manufacturers of others' designs?

    since we are talking china here i wonder if there is some stealing going on here.

    i did notice a chinese phone ad for metro pcs recently i think.

  • iosweekly

    I see a lot of these phones selling in the unsubsised market, free of contract. This is a big market – a not small minority of the market can not afford huge voice & data contract requirements to purchase the leading iphone & android models.

    This is the same market that apple is probably going to target with its rumored unsubsidised iphone "mini" or whatever it will end up as.

  • CndnRschr

    These companies are (and will continue to be) ravaging Nokia's low end. What wasn't appreciated by last weeks announcements from Espoo was that Nokia will soon be a much smaller company – essentially focussed on Europe and trying to get a foothold in NA. Africa, SE Asia and SA will gobble up the products from Huwei and ZTC (and their clones). Unless you own your own software, you are competing with the lowest common denominator.

    • Er, you missed the bit where Elop mentioned expanding S40 and looking for the 'next billion' mobile phone users then?

      If you took their charts on R&D spend, the 'Mobile Phones' division's budget actually increases. It was the one area that Nokia are to increase spend.

      • asymco

        Another strategy failure. The next billion mobile users will use Android. Feature phones will be completely extinct in five years.

      • Narayanan

        Or putting it differently, Android circa 2.1 or 2.2 becomes the new feature phone, albeit with an expanded set of functionalities.

        I wonder what will be Apple's response. But as we all know, being the great imitator that Android is, it won't be long before the cycle starts all over again.

      • Nokia are already calling some of their S40 devices 'smartphones' eg.

        Nokia Betalabs released a Foursquare app for S40 today.

        It's bizarre but it looks like Nokia intends to make S40 more of a smartphone OS rather than use Symbian.

  • CndnRschr

    Didn’t miss that, but I do think that Nokia will have as much difficulty at the low end as the high end. These markets are radically changing and new players are moving in across the board. Will Nokia be able to reinvent itself in time? Perhaps – it is certainly awake to the threats.

    • It will be interesting to see where Nokia think the next billion are. I was looking at Huawei's IDEOS Android phone which sells for about $100 in Kenya on Safaricom. Nokia's C3 S40 based qwerty phone is more expensive at about $120. I'm not sure quite how the deal works with those but there's obviously some keen pricing competition as a SIM Free C3 is £104 in the UK whereas the IDEOS is £150. (prices inc VAT)

      The IDEOS is 320×240 screen, Froyo, ARM11 528Mhz CPU, 256MB RAM, 200MB storage, No SD card.

      C3 specs are similar except S40, 64MB RAM, 55MB storage, 2GB SD card included.

      What might be more important for developing countries though is the battery lasts about 3 times as long as the Huawei. 800 hours v 330 hours standby.

      I wonder which is making the most margin as that Huawei is a lot of hardware for the money.

      It does beg the question as to why if Huawei can get Android down to that price, why Nokia weren't using Symbian on similarly priced handsets.

  • airmanchairman

    Last year their smartphone input was zero. I imagine this would skew the gradient of any graphs drawn and lead to unreliable projections as to what happens next.

    Perhaps next year? It will come along soon enough – it's amazing how time seems to fly faster and faster…

  • It is just as possible that these new Asian cell phone companies will go away as quickly as they grew. Take a look at Amoi who was the number 3 phone in China around 2007.
    They went from nothing to 6 to 8 million phones a year in less than 24 months and went back to zero in an other 24 months.