Abstract

In Switch to Branded Business, Retail Channel Strategies and Resource Allocations Are Key

In 2006, HTC, which used to specialize in contract production of smart cellular devices, announced its plan to push its own-branded business, in a bid to create new growth momentum. To date, HTC has become one of most important smart cellular device brands in the world. With strategic thinking similar to that of HTC, ZTE's decision to enter retail channels and sell its own branded mobile phones aims to create new growth momentum.

ZTE had outstanding cost control capability when performing contract manufacturing services. However, ZTE's decision to enter retail channels may create new challenges related to the openness of retail channels, selection of channel partners, allocation of retail product lines, and the revenue sharing system in retail channels.

Additionally, ZTE has to invest a massive amount of resources to establish its retail presence in China and other countries. It also has to choose retail distribution partners and set up a profit-sharing system. Therefore, at the beginning of its retail channel operations, ZTE's profits in this area may not be higher than those of its contract manufacturing business. The new business model may not be able to efficiently boost the company's revenue right away.

Like its alliances with telecom operators, building a strong tie-up with large-scale retailers takes time. ZTE's contract manufacturing business, however, is unlikely to be impacted considerably as there is no significant conflict of interest between developing retail channels and providing contract manufacturing services for telecom operators. Its competitiveness in the contract manufacturing business and sales of telecom equipment provide significant resources in support of ZTE's own-brand development.

Leveraging Partnerships with Telecom Operators to Push Brand Awareness

Most of the products manufactured by ZTE for telecom operators were sold under operators' brand names. The company's own-branded business was mainly in the production of telecommunications equipment.

ZTE's decision to operate in retail channels and focus more on own-brand operations is expected to create new challenges. This is due to the fact that there are considerable differences between developing the telecom operator market and regular consumer markets in terms of brand management, marketing, and channel operations.

Nevertheless, ZTE's entry into retail channels still has high significant potential. ZTE can leverage its existing partnerships with the world's first-tier telecom operators to increase ZTE's brand awareness and image. For example, in July 2008, ZTE and Vodafone jointly launched a mobile phone at the annual Wireless Japan exhibition held in Tokyo, Japan, significantly boosting ZTE's own products through Vodafone's brand image.

Targeting China and Emerging Markets First Before Mature Markets

ZTE's entry into retail channel operations had to start in China, as the company has already established a strong brand presence in China. Meanwhile, the company has longstanding partnerships with major Chinese telecom operators and brand-recognition among end-market consumers is high.

China is promoting its own 3G technology standard, TD-SCDMA. ZTE has launched several mid-range and high-end TD-SCMDA products and was awarded various equipment tenders. With arguably the most comprehensive TD-SCDMA product line, ZTE will be able to further push its brand image.

Currently, ZTE's product lines cover GSM, CDMA and WCDMA (Wideband Code Division Multiple Access) phones. With 3G service competition in China about to start, ZTE opted to retail its own-branded products in China first in order to benefit from this 3G trend.

In some emerging markets, ZTE's mobile phones sold by regional telecom operators have been well received by consumers. It has relatively comprehensive value-line and mid-range product lines. Despite of the fact that ZTE's brand image in emerging markets is not as strong as in China, through strategic marketing and promotional activities, as well as partnerships with regional telecom operators, ZTE has opportunities to further boost its brand image in these markets.

The United States and Europe are key battlegrounds for mobile phone vendors focusing on own branded businesses. This is due to the fact that, on average, consumers in mature countries have more disposable income and accept higher-priced products. Also, they tend to value product quality. Should a company's own-branded mobile phone gain high acceptance in mature markets, the rollout of the said phone in other regions will be considerably easier.

In the past, the quality of ZTE products ZTE has been stable. However, ZTE's brand image is not yet very strong. Currently, value-line and mid-range products' share of total ZTE's product shipments is still high. It will not be easy for ZTE to sell value-line and mid-range phones in mature markets and make considerable profits.

Due to the lack of high-end models in the company's product line-up, and its relatively weak brand image in mature markets, market acceptance for ZTE's own-branded mobile phones will take time. The abovementioned factors are obstacles ZTE must overcome when operating its own-branded business in mature markets. 

Overall, ZTE will need time to win customer acceptance and develop its own branded business in mature markets. Moreover, retail channel operations in China and emerging markets are quite different from mature markets. Efficiently allocating its resources and establishing a long-term investment plan will be key issues for ZTE in the future.

Appendix

List of Companies