SMARTPHONES: Pepsi Smartphone Set to Fizzle in China

Bottom line: A new Pepsi-branded smartphone set to launch in China next week could get an initial boost from strong publicity, but will quickly fizzle due to lack of special features to distinguish it from others in the crowded market.

Pepsi phone coming to China

An entertaining new twist to China’s overheated smartphone story is coming from the soft drink sector, with word that global beverage giant Pepsi (NYSE: PEP) is preparing to enter a crowded space that hardly needs any new entrants. The headline looked somewhat strange to me, though nothing surprises me these days in a market where names like industrial equipment supplier Sany (Shanghai: 600031) and air conditioner maker Gree (Shenzhen: 000651) have all jumped on the smartphone bandwagon.

Such a bandwagon approach is quite typical for China, where local companies are always quick to join the latest trends even if they have little or no experience in the business. But foreign names are usually a little more savvy, and this particular instance was the first I could recall of a major foreign brand joining this kind of silly herd mentality that often ends in failure and big losses for the associated company.

That prompted me to read beyond the headline, where I learned that Pepsi has actually licensed its name to a domestic manufacturer, which will use the brand for a new line of smartphones it will make and sell. Still, the story does show just how overheated China’s smartphone market has become, and I seriously doubt this Pepsi smartphone foray will sell very many models or do much to promote the company’s brand.

All the buzz began with a series of microblog posts on Weibo (Nasdaq: WB), the homegrown Chinese equivalent of Twitter, hinting at an imminent launch of a Pepsi-branded smartphone in China. (English article; Chinese article) The blogger teased that Pepsi would launch the phone next week, along with related accessories. The models would be distinctively low- to mid-range, selling for 1,299 yuan, or about $200.

As media flocked to the story, it gradually became clear that the phones would be made by a high-tech firm in the southern boomtown of Shenzhen. The Pepsi name and logo appear in abundance on the microblog of the company, whose name translates as Wanfeng Technology and which probably paid a hefty price for licensing rights.

Cellphones themed with Japanese Hello Kitty brand are also prominently featured on Wanfeng’s microblog page, and other reports say the company’s partners include the likes of Konica Minolta and homegrown smartphone maker Xiaomi. After being contacted by numerous curious reporters, Pepsi finally came out with a statement confirming the move and adding the tie-up was part of a new licensing deal.

Only in China

Pepsi said the phones would only be available in China, and it had no plans to get into the smartphone business by itself. Instead, the deal was part of its broader strategy to expand its brand through licensing tie-ups. Other companies engage in similar deals, most notably Hollywood studios like Disney (NYSE: DIS), which sell the rights for their various characters to third parties for use on clothing and other consumer products.

Pepsi clearly wasn’t prepared for the media storm this particular licensing agreement would create, though it undoubtedly doesn’t mind the publicity. It might feel differently when the actual phones hit the market next week, especially if they don’t get very positive reviews from consumers, which seems almost inevitable.

More broadly speaking, this story does highlight the fact that China’s smartphone market has become extremely overheated and manufacturers and brands are looking for any advantage they can find to one-up their rivals. The market has exploded over the last 2 years to become the world’s largest, with around 100 million units now sold each quarter. But the breakneck growth has come to a screeching halt this year, leading to bloody price wars between the dozens of smaller and big domestic players that piled into the space.

At the end of the day, this particular licensing deal is probably bound to fizzle, though perhaps the Pepsi phones could notch up to 100,000 sales due to all the recent publicity. Wanfeng is probably a capable smartphone maker. But aside from having the Pepsi name on them, these new Android-based models will have a difficult time differentiating themselves from a crowded field of phones that mostly look and perform the same.

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