I’ve been following the world of technology for more than a decade now, and so many big names have come and gone during that time that nothing really surprises me anymore, especially in the cellphone space where 2 years is the equivalent of an eternity. That seems like an appropriate backdrop for the latest smarphone data, which show that Huawei has come roaring out of nowhere to become the world’s third largest player, according to the latest quarterly figures from data-tracking firm IDC. (English article; Chinese article) At the same time, another recent Chinese fast-riser, ZTE (HKEx: 763; Shenzhen: 000063), has also cemented its place in the global top 5 by finishing at number 5. For anyone too lazy to connect the dots, that means that China now owns 2 of the top 5 spots in the important global smartphone market, with Huawei and ZTE collectively controlling about 9.2 percent of the market in the fourth quarter of last year, up from 7.5 percent a year earlier.
By way of background, both Huawei and ZTE were formerly 2 of China’s most promising telecoms companies, rising to global prominence on strong growth in their telecoms networking equipment. Their inexpensive, relatively high quality products helped the to quickly found an audience with telcos that traditionally purchased most of their networks from big western names like Ericsson (Stockholm: ERICb) and Alcatel Lucent (Paris: ALUA).
But the Chinese pair have seen that part of their business slow sharply in the last 2 years, partly due to a broader global slowdown but also because of political resistance in the west due to national security concerns. In a bid to offset that slowing growth, first ZTE and now Huawei have both poured huge resources into developing smartphones, which are less controversial than the traditional networking equipment businesses and also have huge potential due to rapid growth of the mobile Internet.
Having cracked into the top 5, the big question that lies ahead for both Huawei and ZTE is whether they can stay there. In my view, the much more likely scenario will see these 2 companies shine brightly for a year or 2 in the smartphone space, before quickly fizzling and ending up as yesterday’s news.
If I were feeling generous, I might compare Huawei and ZTE to former faded giants Motorola and Nokia (Helsinki: NOK1V), which each dominated the cellphone space for more than a decade before finally falling onto difficult times when they failed to recognize and develop products for the latest industry trends. I could even compare Huawei and ZTE to the more modestly successful HTC (Taipei: 2498), the Taiwanese firm that was among the earliest to recognize the importance of smartphones.
HTC’s early entry into the smartphone space helped to propel it to one of the top 5 players and briefly made the company a global superstar. But as is so often the case, such fame was only temporary and now HTC is struggling to compete. In fact, Huawei’s entry into the global top 5 comes largely at HTC’s expense, since the Taiwanese firm formally crashed out of the top 5 in the latest quarterly rankings.
While Motorola, Nokia and even HTC rose to prominence on their innovation and ability to quickly recognize industry trends, I see none of those qualities in either Huawei or ZTE, at least not yet. Instead, this Chinese pair has risen largely on its ability to do what Chinese companies do best: make cheap products with relatively high quality.
What’s more, both Huawei and ZTE are believed to be losing big money on their smartphone operations, as they sacrifice profit margins to quickly gain global market share. That strategy was at least partly behind ZTE’s posting of a massive loss for 2012, although the company has recently said it could return to the profit column in this year’s first quarter.
At the end of the day, there’s always the possibility that either Huawei or ZTE, or perhaps both, could transform themselves from low-cost manufacturers to innovators and maintain their positions in the global top 5 smartphone makers for a few years. But I suspect that both will quickly discover it’s much easier to break into the top 5 than to actually stay there, and I wouldn’t be surprised to see one and possibly both crash out of the global smartphone leader board by the middle of 2014 or even earlier.
Bottom line: Huawei and ZTE are unlikely to maintain their position as top global smartphone makers for long, with one or both companies likely to slip out of the top 5 by the middle of next year.
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