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Biggest Risk to Apple is not Samsung, but Chinese Telecom Giants Huawei and ZTE commoditizing the Smart Phone Market

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Smart Phone Industry

When you talk of the smartphone market, the talk is all about Apple and Samsung who have cornered over half of the global smartphone market making billions of dollar in net profits in the process. Erstwhile leaders like Nokia and Research in Motion are now fighting for survival as they failed to keep up with the rapidly changing market trends and technology. Some of the other big mobile phone leaders like Motorola, Sony Ericsson, LG have either been gobbled up or have become non-entities with little marketshare or influence.

However just as Apple brought a paradigm change to the smartphone market, Chinese telecom giants ZTE and Huawei are slowly and invisibly bringing another radical change to the market. They have converted smartphone into commodities like PCs and are selling dirt cheap smartphones. These mobiles are great value for money running on free Android and have good basic hardware. Huawei is already the 3rd largest smartphone vendor and ZTE is growing rapidly as well. Note there exists a large number of mobile phone companies in India and China which sell smartphones but they lack the marketing and financial power of Huawei and ZTE. These two companies have built a massive telecom equipment business which is threatening the likes of Alcatel Lucent (Fired 5000 workers recently) , Nokia, Siemens and Ericsson. Now these companies are targeting the smartphones using the synergies of their existing telecom business.

Almost 2 billion consumers in China and India are hungry for smartphones like Galaxy and iPhone but they lack the buying power. ZTE and Huawei are providing them with almost 80% of the functionality at 30-40% of the price. Like PCs, smartphones could become commodities as ZTE and Huawei use increasing scale to further lower costs and prices.

How Nokia & RIMM Went Downhill Due to Apple

The once dominant Nokia with a 40% global marketshare of the mobile phone market, continuously declined as was evident in its share price. Despite numerous restructurings, management and strategy changes, nothing seemed to work against the onslaught of Apple and Android. Nokia’s trajectory went downhill from the peak. Its marketshare has been steadily coming down. More importantly its share in the lucrative high end smartphone market is falling faster. It is concentrating on the other segments of the mobile market to defend its units where it is also getting hammered by competition from Samsung, LG in the middle segment and local players at the lowest segment. Nokia forms a classic case study of a Technology Company which failed due to failure of its R&D though Marketing also played a role. It tried shuffling the management and creating a new “smartphone” division to bring new ideas into its staid mobile division. Nokia has been losing marketshare, brand appeal and pricing power as Google and Apple capture the hearts and minds of the smartphone consumer. Apple has radically changed the mobile industry with the introduction of the iconic iPhone.

Research in Motion, the maker of BlackBerry smartphones used to be a stock market darling not even a couple of year ago. However in the last few years, things have dramatically changed in the smartphone market with the advent of Apple and Google. RIMM’s stock price has crashed down to all time lows even as Apple has become the largest company by market cap in Nasdaq. There is no Future for RIMM as an independent entity as it continues to lose brand appeal, marketshare and revenues to bigger and innovative rivals. Like Palm being taken over by HP, it seems destined to be bought by a bigger tech company. Nokia and RIMM seem to be the best fit because of complementary strengths. Both have been bruised by the Apple-Google juggernaut and are now trading at very low valuations. Nokia is strong in the low end phones while RIMM is great at smartphones. RIMM is strong in the USA market where Nokia is extremely weak.

The New Smart Phone Powerhouse

Sales of smartphones are booming, though very few phone makers have been rejoicing. Nokia (NOK) and Research In Motion (RIMM) have seen their once-formidable businesses collapse into a mess of red ink and layoffs. HTC’s sales have tumbled. Once-proud Motorola Mobility has been acquired by Google (GOOG). Sony (SNE) and LG Electronics (066570) are confirmed also-rans.

Feasting on this wreckage are, of course, Apple (AAPL) and Samsung Electronics (005930), which between them have 54 percent of the global market. The other big winner: Huawei Technologies. A company many Americans haven’t even heard of may well have passed Nokia last quarter to become the third-largest smartphone maker, according to Horace Dediu, founder of equity research firm Asymco. That’s up from No. 7 at the end of last year. “They’re the guys that don’t get a lot of respect because they’re not big in the U.S.,” says Dediu. “But they’re looking at big numbers.”

After it was founded in 1987 by civil engineer Ren Zhengfei, Huawei quickly became China’s high-tech success story by selling telecom gear to phone companies, routinely beating rivals such as Alcatel-Lucent (ALU), Ericsson (ERIC), and Cisco Systems (CSCO) with good-enough products and great prices. Only in the mid-2000s did it start making cell phones. The Shenzhen-based company’s inexpensive, often unbranded models gained traction in China, the Middle East, and Africa.

Huawei kept this low-cost approach as it got serious about smartphones in 2009. The company didn’t try to build its own software operating system like Apple, Microsoft (MSFT), Nokia, or RIM. It used Android. And unlike Samsung, HTC, or Motorola, it didn’t try to differentiate Google’s mobile software with its own tweaks. “Huawei just slapped Android on some hardware and shipped it,” says ABI Research analyst Michael Morgan.

This year, the company expects to triple its smartphone sales to 60 million units, in part by taking a bigger chunk of the U.S. market. Until now, it’s sold handsets costing less than $200 to carriers such as MetroPCS and Cricket that offer pay-as-you-go plans, mostly to lower-income consumers. Last November it landed a deal with a top-tier U.S. carrier when AT&T (T) started selling Huawei’s Impulse phone for $29. On July 11, T-Mobile announced that Huawei would be building two models in the carrier’s MyTouch line of handsets. “We essentially made the market for affordable smartphones,” says William Plummer, Huawei’s U.S. vice president for external affairs. “We’re in a good position because we’ve established ourselves as a trusted partner to carriers.”

Not completely trusted, however. On Capitol Hill, the House Permanent Select Committee on Intelligence has been investigating whether efforts by Huawei and ZTE, another fast-growing Chinese telecom equipment and phone maker, to sell to U.S. carriers present a security risk, because the companies may have ties to the Chinese government. The Australian government has banned Huawei from bidding on a national broadband project. Congress has asked the State Department to investigate whether Huawei illegally exported embargoed technologies to Iran. For years, industry insiders have believed that Huawei has access to low-interest loans from the government. Huawei spokesman Francis Hopkins says the company is cooperating with the congressional investigation, gets no favorable loans from the Chinese government, and denies wrongdoing in Iran. It definitely has benefited from huge domestic broadband buildouts, says Jeff Heynen, an analyst with consulting firm Infonetics.

Succeeding in smartphones is not optional for Huawei if it wants to remain a fast-growing company. Its $23 billion-a-year telecom equipment business grew only 3.5 percent in 2011, before tumbling due to the slowdown in China’s economy this year, says Heynen. The company reorganized last year to create a separate Huawei Devices unit to drive what executives say is the company’s best growth opportunity. The division also makes laptop modems and other less-sexy gizmos.

Huawei’s growth rate may make it a plausible challenger to Samsung in smartphone sales, says Asymco’s Dediu. He argues that the Korean giant has prospered largely because of vertical integration; it makes many of the chips and screens that go into its devices. Yet he doubts Samsung has built up enough brand loyalty to withstand a much cheaper alternative. “Let’s not forget that Samsung itself was No. 4 or 5 just a few years ago,” says Dediu. “Samsung ought to be looking over its shoulder.”

As smartphones evolve from novelty technology into just another gadget, Huawei will be well positioned to benefit. “Their devices don’t have to have jet packs to do 90 percent of what most people need,” says Morgan of ABI Research. “The market is coming to them.”

The bottom line: Late last year, Huawei was No. 7 in smartphones. Now it may be No. 3—and is pushing hard to sell its inexpensive handsets in the U.S.

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Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.

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