SMARTPHONES: Lenovo Brings Zuk Home, TCL China Sales Plunge

Bottom line: Lenovo’s new emphasis on its year-old Zuk smartphone brand and TCL’s plunging sales reflect ongoing cutthroat competition in China, though neither company is likely to give up the domestic market anytime soon.

Lenovo launches new Zuk phone

New headlines surrounding 2 of China’s bigger stumbling smartphone makers reflect the market’s current state of chaos, as more than a dozen well-funded brands battle for surpremacy. Leading the headlines is PC titan Lenovo (HKEx: 992), which has decided to bring its young Zuk smartphone brand back into the parent company after initially letting it operate independently.

At the same time, faded giant TCL (HKEx: 2618) has just reported worrisome quarterly results that show its China smartphone sales plunged by more than half due to the market’s fierce competition. Both Lenovo and TCL are rapidly becoming victims in China’s bloody smartphone wars, though each is unlikely to withdraw from the market anytime soon due to strong backing from a cash-rich parent.

Let’s begin with Lenovo, which has become a symbol of the carnage now piling up in a Chinese smartphone market overpopulated with low-end phones that mostly look and function alike. The company has fallen from the top 5 brands in China and barely finished in the top 10 at the end of last year, as its older Lenovo and newer Motorola brand phones failed to find an audience.

Now the company appears to be pinning big hopes on its young Zuk brand, launched last summer as an independent unit. Media are reporting that Lenovo has decided to bring Zuk back home to be directly managed by its own mobile division, following a recent major reorganization to try and improve the struggling mobile business. (Chinese article)

Embattled Lenovo CEO Yang Yuanqing discussed the move at an event in Beijing for the China launch of the newest Zuk model, the Z2 Pro. (company announcement) Reviews for the phone look generally positive, which is an early good sign. But the fact that Lenovo is turning to a young, unknown name like Zuk to reverse its sliding fortunes shows just how miserably the company’s core Lenovo and Motorola brands have done.

Plunging Sales

Next let’s look at TCL, which was one of China’s earliest cellphone giants to emerge more than a decade ago. The company has experienced a number of ups and downs since then, and had recently been making some headway back into its home China market.

But now TCL’s cellphone unit, TCL Communications, has just released its latest quarterly report that shows its China cellphone sales plunged 70 percent in terms of revenue to just HK$300 million ($38 million) in the first quarter. (Chinese article) Unit sales also plunged 55 percent, with smartphones down a steeper 68 percent to just 500,000 for the quarter.

The dismal results prompted one analyst to slash his price target for TCL Communications to HK$3.20 from HK$6.60, versus the stock’s last price of HK$5.12. Both TCL and Lenovo stocks have dropped sharply in tandem with their sinking smartphone sales, down by 40-50 percent over the last year.

The problem is that neither of these companies is showing any signs of surrender anytime soon, as both have plenty of cash and see the China market as critical to their future survival. Lenovo is still quite profitable overall due to its more mature PC business, and TCL has similar resources from the much larger TV business of its parent, TCL Corp (Shenzhen: 000100).

Other big names like ZTE (HKEx: 763; Shenzhen: 000063) and Xiaomi have also vowed to stay in the China smartphone market, and have similar big cash resources to fight for at least several more years. At the end of the day, some of the smaller brands like Coolpad (HKEx: 2369), OnePlus and Smartisan are likely to become the first major victims of China’s smartphone wars, though I expect that none will disappear without a good fight.

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