Abstract

Overseas Markets to be Main Revenue Driver for ZTE

With China's operators scaling back their involvement in the PHS market and with the third stage of China Unicom's CDMA network deployment project already completed, the revenue growth rate in ZTE's mobile communications network equipment business - which accounts for the largest share of ZTE's total revenue - fell dramatically from 61% in 2003 to 12.9% in 2004. With the Chinese government continuing to delay the issuing of the first 3G licenses, ZTE will be forced to rely on overseas markets for revenue growth.

Up until now, the main emphasis in ZTE's overseas market development strategy has been on developing nations, particularly emerging markets in South Asia and Latin America. ZTE's low prices make it very competitive in these markets. However, ZTE is now starting to focus more on the European 3G market. The challenge for ZTE now is to leverage its price advantage to get customers in Europe to accept what is to most of them a relatively unknown supplier. Successful development in the European market is a prerequisite for ZTE to establish itself as a truly world-class telecommunications equipment vendor.

Maintaining Growth in Terminal Market Will Be a Challenge

2004 saw the leading international handset vendors making a serious effort to win back market share in the China market. Several Chinese handset vendors - including TCL and Amoisonic - experienced a continuing fall in sales volume. However, ZTE was able to leverage its close relationship with mobile operators and its strong position in the PHS segment to achieve a handset sales volume growth rate in excess of 100%. In May 2005, ZTE overcame Motorola to secure an order for value-line and mid-range CDMA handsets from China Unicom; as a result, ZTE moved into the top three CDMA handset vendors in China. ZTE's impressive performance reflects the growing importance of mobile operators within the Chinese mobile phone market - including PHS, CDMA and GSM - as a whole. Nevertheless, ZTE - which started out as a network equipment vendor - is still learning the ropes in the terminal market; this is reflected in the relative weakness of ZTE's brand management and open channel operations compared to other Chinese handset vendors.

The changes in the fortunes of Chinese handset brands such as ZTE, TCL and Amoisonic show that the main focus of competition in the Chinese mobile phone market is shifting away from marketing and back towards the fundamental factors of R&D and cost control, as the market becomes more mature.